Dear Fellow Members:

PIC or GNC?
(or The Effect of Regulatory Changes on our Club’s Legal Status and Operations)

Over a year has passed since new laws regulating private sector non-profit activities have come into force. Whereas ‘public interest’ and ‘mutual benefit’ associations and foundations were previously lumped together under a system rooted in the Civil Code and dating back to the Meiji Era, the new regulations draw a clear line between non-profits engaged primarily in activities benefiting the general public and those pursuing other interests. (‘Public interest’ status basically requires allocating 50% or more of an organization’s expenses to public benefit activities).

Pre-existing associations and foundations wishing to continue their activities must submit an application to re-register as either a public interest corporation (PIC) or general non-profit corporation (GNC) by November 30, 2013. Inaction means dissolution and forfeiture of assets.

The more exalted public image and preferential tax treatment of a PIC would seem to settle the issue of which status would be better for our Club. However, we would first have to address the questions of what constitutes public interest activities and whether our current activities would qualify as such.

In a broad sense one might argue for instance that our Club engages in cultural exchange and supports local government efforts to promote international friendship and foreign investment. However, the new guidelines seem to take a rather narrow view by cataloging specific activities, albeit with the caveat that unlisted ones may also qualify on a case-by-case basis. Ultimately, the decision seems to be left to the authorities, whereby the view from Kasumigaseki may differ somewhat from the local perspective.

Incidentally, whereas the Ministry of Education, Culture, Sports, Science and Technology (MEXT) currently acts as our Club’s oversight authority, when it comes to filing an application for renewal of status we have the option of choosing between the central government’s (Cabinet Office’s) Public Interest Corporation Commission (PICC) and the Hyogo Prefectural PICC.

What other factors should we take into consideration in deciding which status is right for us? There are many, but the more important ones seem to narrow down to the following (not necessarily in order of importance):

Internal Governance and Regulatory Oversight
As a PIC we would be subject to strict guidelines regarding our mission statement, activities and internal governance. We would be required to file a comprehensive annual report on finances and activities to the oversight authority and submit to inspections. Should it ever be determined that we are no longer in compliance, our status would change to GNC, however, only on condition our assets are first passed on to a PIC or paid to the government within one month. In most cases this would signify the end of the road.

With the exception of activities associated with the Public Benefit Spending Program (see below), GNC’s are much freer in defining their purpose and activities and in designing their internal management structures. There are no reporting requirements (apart from income tax returns) or any regulatory oversight (except for the period during which the Spending Program is being implemented).

Finances and Taxation
Both PIC’s and GNC’s must pay corporate income tax on income derived from designated ‘for-profit activities’ that typically compete with those of regular, tax-paying businesses. In the case of our Club, our food and beverage operations (whether involving members or 3rd parties) are already subject to income tax, although at a preferential rate. Under the new regulations the preferential treatment will cease, and the same corporate income tax rates as paid by regular businesses will apply to the for-profit operations of both PIC’s and GNC’s.

For GNC’s non-profit activities to continue to qualify for tax exemption certain conditions must be met, the most important being the inclusion of provisions in the Articles of Association forbidding income distribution and pledging upon dissolution to cede net assets to a PIC or the government. GNC’s not complying with the tax exemption requirements must pay tax on their entire income in the same way regular businesses do. However, it should be noted that forgoing tax-exempt status could offer tax benefits in some cases, although there could be a one-off tax event at the time of status change.

Consequently, when it comes to taxation of business income PIC’s and GNC’s are treated equally. On the other hand, while PIC’s will continue to enjoy receiving tax-free investment income, GNC’s will have to pay withholding tax at a rate of 20% on interest and dividends, even if the invested assets are associated with the non-profit side of its operations.
Nevertheless, with regard to taxation the difference between PIC’s and GNC’s doesn’t seem significant. By far the more seemingly ominous impact on the future finances of existing organizations seeking to transfer to GNC status is the requirement to institute a ‘Public Benefit Spending Program’ (Spending Program), whereby a GNC must pledge to spend the equivalent of its net assets (calculated at the time of transfer of status) on public interest activities. In principal there is no time limit on fulfilling this requirement, however, the GNC must report annually and submit to inspections by an oversight authority while the Spending Program is in progress. Moreover, the activities associated with the Program must be anchored in the Articles of Association until completion.

At first blush the Spending Program appears to be a form of confiscation. The official logic seems to be that an existing non-profit organization’s net assets were derived either from subscriber donations intended to support public benefit activities or as a result of its tax-exempt status. Consequently, in order for such an organization to transfer to a legal status that frees it from its public interest obligations, it must first relinquish its assets for the public good.

The amount to be allocated to the Spending Program is the sum of a GNC’s assets calculated at current prices less current and contingent liabilities.

It isn’t hard to imagine what this means for an organization with few or no liabilities and assets such as real estate that were purchased decades ago and appear on the books at a fraction of their current worth.

So on the surface it would appear that the Spending Program would present an almost insurmountable hurdle for an association endowed with unrealized wealth and relatively little cash and a limited income stream. Taken together with the seemingly impossible requirements and risks of PIC status, non-profits such as our Club appear to be caught between the devil and the deep blue sea.

However, as with all things one must delve into the details to find that proverbial devil and confront it. And in so doing we may yet find a way to avoid the end of the road for our Club, an outcome that the authors of the revised laws assure us was never their intention.

Although further study (and above all consultations with legal and tax experts familiar with the new regulations) is required, there seem to be a few bright spots that light the path forward.

With regard to the Spending Program, a major point of interest is a special provision in the new law permitting income-based valuation of real assets (land and buildings), provided they are intended for long-term use in the pursuit of non-profit interests. What this signifies for our Club is yet to be determined in detail; however, early contacts with a real estate appraiser familiar with the legalities point to the possibility of valuations significantly lower than market prices or property tax values. Should we choose to pursue GNC status, the Club should budget funds for an appraisal based on the special provision.

As for the other component of the Spending Program, namely the public benefit activities, there are several current Club programs and practices that may very well qualify. Again, were we to elect applying for GNC status, we should consult a qualified accountant to determine the monetary value of these programs and approach MEXT and/or Hyogo PICC for pre-consultations.

Conclusion
There is no standing still or turning back. The deadline for submitting an application may seem a long way off, but if one considers the workload of preparing the application, not to mention the process of deciding which status to pursue, the time has come to take the bull by the horns.

You may feel my article doesn’t answer the question posed by its title. Indeed, the decision to choose a new status for our Club rests with the members, and the General Committee must lead the way towards a consensus. Personally, I would recommend a status that best reflects who we are and is sustainable over time.

-Rick Brueggemann, Policy Development
General Committee

Saturday, Oct. 3rd

Fatigue lined the faces of the passengers as they gazed over the railings at the shores of Awaji and the calm expanse of Osaka Bay beyond. As they gathered up their belongings and prepared to disembark, the glint of hope in their eyes belied the doubts that gnawed at their hearts.

The year was 1868, and today we know these adventurous men and women went on to build homes and livelihoods and eventually organize themselves into a vibrant community. But it was during the early days of uncertainty and hardship that the seeds of what would later be known as the Kobe Club were sewn. And despite the challenges that later generations would face, our Club stands proudly today as a beacon to those who put faith in the notion that people of different creeds, culture and political persuasion can interact in a spirit of friendship and mutual respect.

On Saturday, October 3rd, 2009 a capacity crowd of 175 members and guests representing all four corners of the earth and every conceivable walk of life gathered at the Club to celebrate this legacy and renew their pledge to uphold and carry it forward. But the 140th Anniversary Ball was not only an event of historical significance; it was also a grand affair that served to highlight the many facets of our great Club.

The evening started in the garden with champagne served to the soothing sounds of a violin, but the pace soon picked up with a lively ‘taiko’ drum performance to signal the opening of the tastefully appointed ballroom. Club President Rainer Weiland then addressed the gathering and introduced His Excellency Mr. Toshizo Ido, Governor of Hyogo who honored us by leading the traditional ‘kagami-biraki’ (opening of the sake barrel), ably assisted by Kobe City representative Mr. Kyoji Ueda, Rainer and three past presidents.

The full-course dinner featured a seafood and vegetable terrine, French chestnut soup, turbot ‘en papillote’, sautéed beef with foie gras Rossini-style and an ‘Anniversary’ dessert. The many compliments heard around the tables attested to the high standards we have grown accustomed to expect from Chef Kamiki and his team.

Dinner was followed by dancing to sounds of Jeanette Kawasuji and her band. Later in the evening all eyes and ears were riveted to the stage as the door prizes were announced. Then it was back to dancing and merry-making until the wee hours. And as has been the Kobe Club tradition for 140 years, a jolly good time was had by all!

  Special thanks to organizing committee members Rainer Weiland, vice-president Imad Ramadan, events coordinator Mohan Gulrajani and bar-and-restaurant convener Michael Cantonwine; to First Lady Tomoko Weiland for donating the dinner table flower arrangements and directing her talented team of decorators; to Spotlight editor Kei Foran for producing the Anniversary Supplement; to Club Manager Sawako Okabe and her staff for their tireless efforts and ever pleasant manner; and to the many contributors who supported us with door prizes and advertisements or worked behind the scenes to make the evening so enjoyable and memorable for the rest of us.

-Rick Brueggemann

The strength of an organization ultimately lies in its ability to adapt to change. Although most change is gradual, at times a radical departure from the tried and true is necessary in order to ensure long-term survival. Our Club continues to exist after almost 140 years not only because it adjusted to the shifting sands of time but also thanks to earlier generations of members who had the courage and foresight to take action when conditions demanded.

Half a century ago our Club uprooted itself from familiar surroundings and moved to its current site. While I’m not necessarily advocating that we relocate again, I do believe we’ve reached a point at which complacency is no longer an option if we are to secure a stable future for our Club.

The fact that a 50 year-old building withstood a level-7 earthquake speaks loudly for the skill and integrity of its architect Mr. Wenceslau J. de Couto. Still, it’s obvious that our clubhouse was designed for a different time and age. A cosmetic renovation in the ‘90s won us some time, but the facilities and amenities one might expect of a modern private club of international standing are sorely lacking. Perhaps more importantly, the structures’ inner workings show signs of fatigue and are a ticking time bomb. It’s fair to say our dear old clubhouse has done a great job but is rapidly approaching the end of its useful life.

As reported earlier, new laws regulating the activities of non-profit organizations require that our Club either reconfirm or revise its legal status within a grace period ending in November 2013. The relevant legislation has only just come into force, and there remain uncertainties regarding interpretation and which course of action would serve our Club’s best interests. However, without going into specifics at this time it seems increasingly likely that the transition will have financial consequences regardless of the legal form we adopt. The Club in its present circumstances is ill prepared to cope with the situation.

Finally, we must also address the fundamental issue that our Club’s level of activity no longer supports its cost structure. This problem didn’t manifest itself suddenly but rather crept up on us over time. Our elegant clubhouse and beautiful surroundings are a valuable legacy passed on to us by earlier generations, but in today’s world the high cost of ownership dictates that assets be put to productive use or eventually forfeited.

Fortunately, our Club is debt-free. Better utilization of our property may hold the key to providing the means to renew our facilities and restore our finances.

With this notion in mind the General Committee has embarked on a feasibility study based on the Tokyo American Club redevelopment model. TAC has decided to lease a part of its premises to a residential property developer for 52 years and use the front-loaded lease income to partially offset the cost of rebuilding its clubhouse. For details I recommend you visit TAC’s redevelopment website at: http://www.tokyoamericanclubredevelopment.org/welcome.html
As our feasibility study is at a very early stage, I’m unable to provide any conclusive details at this time. However, it’s evident that the feasibility of a similar project on our property will depend on whether an acceptable balance can be struck between financial considerations and the need to preserve our integrity as a private membership club.

Most importantly, no project can succeed without the consent and support of our members. The General Committee is committed to keeping the membership informed as the situation unfolds and will strive to present a vision of our Club’s future that reflects the needs and wishes of current and future generations of members.

-  Rick Brueggemann, Strategic Planning

Dear Fellow Members,



Let me begin by apologizing if my last message alarmed or upset you in any way. One of the jobs of the General Committee is to keep you abreast of important matters affecting your Club. And while it’s sometimes difficult to weigh your right to know against the risk of overburdening you with details, I thought the issue at hand was important enough to merit a proper airing. My only regret was the awkward timing of its publication (it being a festive time of year).  

The implications of the new legislation are confusing even to someone who has been following developments as closely as I have. So I’m a bit concerned that my ambitious effort to get the message across in 800 words or less could have resulted in indigestion for some (what with having to cope with the Christmas goose etc.). So at the risk of being pilloried and flogged for my persistence, let me summarize once again.

- Our Club must apply for confirmation of its legal status within five years of the end of 2008. Failure to apply will result in dissolution.

- There are two non-profit categories available to us, ‘General’ and ‘Public Benefit’.

- ‘General’ status would free us from future regulatory oversight and allow us to pursue our own interests as a private membership club.

- ‘Public Benefit’ status requires programs and activities that benefit the general public.

- To acquire ‘General’ status the Club would have to pledge to allocate toward ‘public benefit’ activities a sum equivalent to the market value of its assets less its liabilities at the time the application for status review is made. There is no legally specified timeframe for disbursement of the funds thus allocated, but regulatory oversight would continue until the balance of such funds is zero.

- To acquire ‘Public Benefit’ status the Club would have to pledge to engage in public benefit programs, and these would have to comprise at least 50% of the Club’s entire activities. 

Message from the President

It’s been awhile since I last wrote on the subject of the Club’s legal status, and although the holiday season may not be the best time to address such weighty matters, I do hope you’ll take a moment to familiarize yourself with this important issue. 
Let me start with a recap. New legislation requires all existing associations and foundations to apply within a five-year grace period for re-registration as either ‘general’ or ‘public interest’ non-profit organizations. The latter status is contingent on an organization engaging in activities that benefit the public, with such programs making up at least 50% of an organization’s activities. A glance through the list of recognized public benefit programs suggests that our Club in its current form wouldn’t qualify as a public interest entity by any stretch of the imagination, so ‘general’ non-profit status would seem the only viable option. Failure to submit an application for re-registration would result in revocation of status as a juridical person and force us to disband.