International Philanthropy
Public charities
¦ Direct Foreign Activities. Public charities (501(c)(3) organizations that are not private foundations ) may conduct all or part of their activities outside the United States . Regardless of where a public charity conducts its activities, it must be organized under the laws of a state of the United States in order that contributions from U.S. residents are deductible for federal income tax purposes. This means having a registered office and agent in the U.S. , a U.S. bank account and some (not necessarily all) board members who are U.S. residents. An organization that contemplates operating directly in a foreign country will also need to explore a number of local country legal issues.
An organization wishing to attract support from non-U.S. residents should explore forming an alliance with foreign organizations, or even creating one or more affiliates, such that residents of those other countries may contribute on a tax-favored basis. The nature and availability of tax benefits, and required organizational structure, vary widely among countries.
¦ Grants to foreign charitable organizations; “friends of” organizations. A public charity that wishes to make grants to a foreign organization that conducts charitable activities may do so, subject to certain additional requirements. If (as is usually the case) the foreign charity has not obtained 501(c)(3) status, then (regardless of its status under foreign law) the U.S.-based public charity must take steps to ensure that the grant funds are used exclusively for purposes permitted of 501(c)(3) organizations. The U.S. charity may not act as a mere conduit for the contribution of funds to the foreign organization, but rather must retain discretion and control over use of the funds to ensure that they are used exclusively for 501(c)(3) purposes. It is also critical to maintain proper records.
A "friends of" model is often used for funding charitable programs operated by one or more foreign charities. Under this model, the U.S. charitable organization may solicit contributions to support foreign projects that it has pre-approved. Organizational documents must be carefully drafted to ensure that the U.S. organization retains the required discretion and control.
Individual philanthropy
A U.S. resident (individual or corporation) does not receive a tax deduction for contributions made directly to a charitable organization formed under the laws of a foreign country, even if that foreign organization has obtained 501(c)(3) status. However, a U.S. resident may contribute to a domestic 501(c)(3) organization that directly conducts foreign activities or makes grants to foreign charities. In the latter case, the individual donor may not unconditionally bind the U.S. donee to contribute the funds to a foreign organization, but rather must accept that the U.S. donee retains discretion and control over the use of those funds (see above).
Corporate contributions
If a domestic charity contemplates receiving corporate contributions for use outside the United States, the domestic charity should be formed as a nonprofit corporation, rather than as a trust or unincorporated association. Corporate contributions to 501(c)(3) organizations for use outside the United States are deductible only if the 501(c)(3) organization is itself a corporation.
Private foundations
Like public charities, private foundations are permitted to make grants to foreign charities. However, a private foundation is subject to more burdensome requirements to ensure that the funds are used exclusively for purposes that comply with section 501(c)(3) of the Internal Revenue Code. To avoid having to comply with these cumbersome requirements, many (but by no means all) private foundations restrict their grantmaking to domestic 501(c)(3) public charities.
A private foundation’s grant to a foreign organization will be treated as a qualifying distribution only if one of the following three conditions is met:
¦ The foreign organization has applied for and obtained 501(c)(3) public charity status;
¦ The foreign organization provides an affidavit of equivalency, establishing that it is equivalent to a 501(c)(3) public charity;
¦ The foreign organization enters into an expenditure responsibility agreement with the U.S. private foundation, setting forth detailed reporting requirements regarding the use of the grant funds.
Avoid inadvertently supporting terrorist groups
¦ In general. Under the various counter-terrorism laws and enforcement mechanisms, nonprofit organizations can be subject to a variety of criminal and civil penalties, and asset seizures, for even inadvertently supporting terrorist organizations. The existence of a charitable motive does not provide protection against these penalties. Hence, a nonprofit organization, particularly one that engages in international philanthropy, is well advised to exercise diligence in this area.
¦ What diligence is required? There are no clear rules here. Organizations should assess the level of risk inherent in their activities, and exercise due diligence accordingly. At a minimum, all organizations that make foreign grants should take the following steps:
•Maintain records of policies and procedures. All organizations should adopt diligence policies in this area, and maintain records to establish compliance with their own policies.
•Exercise due diligence about the grantee. Become familiar with the grantee’s operations, officers, directors and staff.
•Check OFAC list. Before making a grant to any foreign organization, the granting organization should check to ensure neither the grantee nor its officer, directors or key employees are on the list maintained by the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”).
Higher risk potential? More detailed guidelines
¦ U.S. Treasury Department Voluntary Guidelines
The United States Treasury Department issued a set of comprehensive guidelines in 2002, and updated them in 2006. Compliance with these guidelines is not required by law, nor does compliance automatically protect an organization from penalties. The guidelines include a list of good governance practices and a list of due diligence actions to be taken before distributing funds. They advise that the extent of appropriate diligence will vary in accordance with a variety of factors affecting the level of risk inherent in a particular case.
•The list includes:
1.gathering detailed information about a foreign grantee;
2.checking the OFAC list to ensure that neither the grantee nor its officers, key employees, directors nor other senior management appear on the list;
3.conducting a reasonable search of other public records to ensure that the grantee and its key employees are not suspected of terrorism;
4.requiring the grantee to certify that it does not deal with anyone subject to OFAC sanctions, known to support terrorism or to have violated OFAC sanctions.
•See U.S. Department of the Treasury Anti-Terrorist Financing Guidelines.
¦ Charitable Sector Working Group Proposed Principles
In response to widely held concerns that the Treasury Department Guidelines were overly detailed and burdensome, a working group of over 40 charitable organizations developed and proposed an alternative set of broad and flexible principles. While these principles have not been adopted by the U.S. government, they reflect the views of a broad-based group of charities regarding best practices in grantmaking. See the Working Group principles.