Any nonprofit organization in Israel interested in receiving government or municipal assistance or assistance from larger funds and charitable organizations requires a certification called an “Ishur Nihul Takin” a.k.a. Certificate of Proper Management. This certification is also necessary in order to receive the coveted Section 46 status, which allows for a tax credit on donations, and without which, can significantly hinder the ability of the nonprofit organization to raise money from private donors.

What is Section 46? What does a Certificate of Proper Management mean? This article provides insight regarding the Certificate of Proper Management and Section 46 – What standards and reporting are required to receive them, as well as what certification implies, and what it does not.

Certificate of Proper Management (“Ishur Nihul Takin”)

The Certificate of Proper Management is issued by the Registrar of Associations certifying that the organization is acting in accordance with the law, and its assets and income are being used for the purposes defined in the nonprofit organization’s articles of association.

Annual Reporting Requirements

In order to obtain a Certificate of Proper Management, an organization must submit an annual set of documents which include the following:

1. Audited financial statements
2. A descriptive report – This report is intended to provide the Registrar of Associations with additional information that is generally not included in the financial statements. The descriptive report is signed by two members of the board and is approved by the general assembly. This includes information like:
   • General description of the organization’s activities
   • Details of the organization’s expenses and sources of income
   • List of affiliated entities
   • List of integral services received and details regarding the service providers
   • Names and other identifying details regarding the board members and other individuals holding managerial positions within the organization
   • Description of any transfer of cash to members of the association or other third-party entities.
3. Meeting records from the general assembly approving the financial statements
4. Meeting records from the general assembly approving the appointment of an internal auditor (for associations with annual revenue/donations of over NIS 300K) 
5. Review and recommendation of the audit committee
6. List of the five top-earning employees
7. List of foreign donations

What is Certified

The Certificate of Proper Management certifies that the organization submitted all of the above and that the Registrar of Associations has had the opportunity to review the organization’s documentation and review its activities.

Consequently, an organization can only obtain a Certificate of Proper Management after two years of activity. Prior to that, an organization that submits the above documentation can receive a temporary certification but not the full certificate of proper management.

The receipt of the Certificate of Proper Management means the Registrar of Associations has not identified significant discrepancies or concerns, such as funds being paid to members or related parties, activities that are not included in the articles of association, disproportionately high-earning employees, etc.  

What Isn’t Covered

That said, the Certificate of Proper Management does not approve the organization’s ability to manage its funds or governance concerns. It also does not mean that they underwent a tax audit by the tax authorities, nor does it mean that the Registrar of Associations assessed them for fraud or misrepresentations.   

Section 46

Section 46 of the Israeli tax ordinance provides an individual with a tax credit equaling 35% of their total donations. Similarly, corporations may receive a tax credit equal to the corporate tax rate.

These are refundable credits and are subject to certain limitations. The credits are only available for donations made to organizations approved for Section 46 by the Israeli tax authority.

How Does an Organization Get Section 46 Status

In order to receive the Section 46 approval, an organization must submit the following documents:

1. Formation documents;
2. Audited financial statements;
3. List of founders;
4. Names and other identifying details regarding the board members and other individuals holding managerial positions within the organization;
5. Registration documents with the Income Tax Authority and the VAT Authority;
6. Certificate of proper management
7. Withholding tax certification from the Israeli Tax Authority
8. A signed commitment statement that the organization will meet certain standards – for example, that they will file annual tax returns, they will not distribute cash or property to anyone outside of the purposes of the organization, or that there will not be any business relationship between the organization and founders or board members or their family members.

Representations, Not an Audit

Please note, that the documents above, specifically the commitment statement, provide guidelines for how an organization with a Section 46 approval would need to operate to maintain the Section 46 approval in case of audit. Nevertheless, the approval itself, specifically for organizations that have not undergone a tax audit, does not confirm they are operating accordingly, rather it is only a representation.  

Some other important representations include:

• The requirement to cap general and administrative expenses. These are based on the size of the organization.
• The requirement to hold cash in a bank account, bank deposits, government bonds, or mutual funds with a majority of its assets comprised of government bonds.
• The requirement for wages to be reasonable relative to the market and to the contribution the employee provides to the association.

Certificate of Proper Management and Section 46 Are Helpful Indicators

In conclusion, the Certificate of Proper Management and Section 46 approval do not confirm the organization has gone through a tax audit or has been scrutinized for fraud or misrepresentation. Nevertheless, it is a good indicator that the organization is managing proper bookkeeping, filing annual audited financial statements, and not making significant distributions/payments to entities or individuals unrelated to the organization’s activities. These certifications require several years to obtain, which implies that the organization has been submitting all the above information to various authorities and has been audited by an external auditor throughout those years. It shows commitment and stability within the organization and is a good base (some may say necessary) for making an informed donation.  

Yehuda Javasky is a CPA (Isr.) and IRS enrolled agent based in Israel and the treasurer of an Israeli nonprofit organization.