Maryna Yakutovych,
Assistant Accountant
Table of Contents
What is Repayable Financial Assistance (RFA) for a Non-Governmental Organization (NGO)?
Non-governmental organizations frequently encounter funding shortages to cover administrative expenses, especially at the initial stages of their operations. The fastest way to bridge such a “cash flow gap” is to utilize Repayable Financial Assistance (RFA). NGOs are permitted to receive these funds without restrictions from any benefactors, including their founders. Providers of RFA can be both individuals and legal entities.
However, it is vital to remember that for organizations holding non-profit status, this financial instrument involves a number of critical nuances.
What exactly is RFA for an NGO?
It is a sum of money transferred to an organization for its temporary use under a contract. It does not entail the accrual of interest or any other forms of compensation and must be strictly returned within a specified timeframe.
From a legal standpoint, RFA is considered a type of loan and is governed by the provisions of the Civil Code of Ukraine.
Key Conditions for Maintaining Non-Profit Status
To avoid losing its non-profit status, an NGO must strictly adhere to the three fundamental rules outlined below:
-
Targeted Use of Funds: Funds may only be utilized to achieve the organization’s statutory goals or to cover its operational and administrative maintenance costs.
-
Prohibition of Profit Distribution: Any distribution of income or pieces of profit to the founders (members), employees, or management is strictly prohibited (with the exception of standard payroll and related Unified Social Contribution (USC) taxes).
-
Compliance with the Charter: All expenditure categories must be clearly defined in the NGO’s governing documents. The organization’s charter must contain an exhaustive list of its activities. If funds are spent on purposes not specified in the charter, they are recognized as taxable income.
In other words, an NGO is fully permitted to use repayable financial assistance (RFA) in its operations, provided that it ensures transparent, targeted utilization of the funds in strict accordance with the organization’s statutory purposes.
The “Self-Contracting” Trap
Great care must be taken when drafting and executing an RFA Agreement. In practice, situations frequently arise where the repayable financial assistance is provided to the organization by its director or founder, who also acts as the head or authorized signatory on behalf of the legal entity according to the Unified State Register (USR). Essentially, this creates a scenario where a contract is concluded “with oneself.”
In this case, the provisions of Article 238 of the Civil Code of Ukraine will be violated, which explicitly states that a representative (in this situation, the director/founder) cannot enter into a transaction while simultaneously representing both parties to the agreement.
The Risk:
An agreement signed by the exact same individual on both sides can be legally challenged and declared null and void.
The Solution:
To eliminate this risk, the assistance must be granted by the founder as an individual to another authorized representative of the organization.
To sign the Agreement on behalf of the NGO, we recommend issuing a Power of Attorney (PoA) to another authorized member of the organization, or, if none are available, to any other authorized individual. This Power of Attorney is issued directly on behalf of the NGO and does not require notary legalization.
Procedures for Documenting and Repaying RFA
- Documentation: Arranging repayable financial assistance requires strict attention to detail. All conditions, including the exact methods of fund repayment, must be clearly recorded in the agreement.
- Accounting: All transactions involving the receipt and repayment of RFA must be properly tracked in the organization’s accounting records.
- The Contract: The agreement must be executed exclusively in written form, explicitly specifying the total amount, the exact repayment deadline, and the interest-free nature of the assistance.
- Cash Limits: When receiving or repaying RFA in cash through the NGO’s cash desk, a strict regulatory limit applies pursuant to Paragraph 6, Section II of the National Bank of Ukraine (NBU) Resolution No. 148. The restriction caps cash transactions at UAH 50,000 per day from a single individual.
- Financial Monitoring: When depositing assistance into the NGO’s current bank account via a bank cash desk, be prepared to submit a copy of the RFA Agreement. For substantial amounts, the provider must be ready to explain and document the legitimate origin of the funds.
- Deposits via Bank Cash Desk: To prevent complications and compliance questions during the future repayment phase, the funds must be deposited at the bank cash desk directly by the provider of the assistance themselves.
- Sources of Repayment: The debt can be settled using the NGO’s standard non-profit inflows, such as membership fees, charitable donations, or grants (provided that the specific grant agreement explicitly permits such expenditures).
Proper documentation of every single transaction remains absolutely critical.
Important:
The repayment of RFA to a founder or director is not legally classified as a distribution of profit. However, the transaction must be explicitly and transparently identified in all payment and accounting records as a debt repayment.
Tax Implications and Conclusions
Terms and Conditions
Even though RFA must be interest-free, it is vital to clearly define its repayment deadline in the contract. The absence of a specific timeframe may cause regulatory authorities to question the economic substance of the transaction and its compliance with non-profit requirements. It is strongly recommended to establish reasonable and realistic deadlines.
Tax Implications
For NGOs holding non-profit status, receiving RFA does not constitute income and is not subject to taxation. Repaying the assistance also does not impact the organization’s tax status.
However, if the assistance is not repaid within the stipulated timeframe, it automatically converts into non-repayable financial assistance (or a permanent charitable donation). In this scenario, tax liabilities (such as corporate income tax) may arise if the retention of these funds does not align with the targeted utilization of funds prescribed by the organization’s charter.
Proper documentation of every single transaction remains absolutely critical.
In summary, NGOs are fully permitted to utilize repayable financial assistance. However, to preserve their non-profit status, they must strictly follow all non-profit compliance regulations and provide solid documentary evidence that these funds are used exclusively for statutory operations and are returned in a timely manner according to the agreement. Adhering to these rules minimizes the risks of losing non-profit status and prevents severe financial penalties.
