Tax Issues for U.S. Donors and Charitable Organizations
James Cassidy, CPA
times throughout my career providing U.S. tax services
to U.S. expatriates and foreign national executives, clients
have asked me if they can make tax deductible contributions
to foreign charities, located either in their countries
of residence or in their home countries. At the same
administrators and executives working for foreign-based
charities have asked whether contributions made by U.S.
taxpayers could qualify as tax deductible charitable contributions
in order to attract more support from U.S. donors.
are the key issues and rules regarding foreign-based
primary U.S. rule is that the organization must have
been created in the United States. A contribution
made by a U.S. taxpayer to a foreign entity that
has applied and qualified for tax-exempt status in the United States does
not result in a deductible contribution for the U.S.
taxpayer because the foreign
charity was not established in the United States.
are a few exceptions; the U.S. currently has treaties
with Canada, Mexico and
Israel that permit deductible contributions in some
only to offset income earned from sources in the respective treaty country.
Canada: Article 21(5) – Contributions to Canadian college
or university not limited to Canadian income
Article 22(2) – No
exception to limit for colleges or universities
Article 15A(1) – Contributions are limited
to 25 percent of income from Israeli sources
above treaty exceptions are generally available to U.S.
residing in or who derive income from these three countries. Nonresident
(including foreign trusts and foreign corporations) are permitted
to deduct charitable contributions only if conducting
trade or business
in the United
States and only
to U.S. charities and governmental units. There is no provision under
a tax treaty that permits a U.S. nonresident to deduct a charitable
contribution made to a
charity in the nonresident’s country of tax residence.
U.S. estate and gift tax rules, however, full estate and gift tax
deductions are allowed for bequests and gifts to "any corporation" organized
and operated for charitable purposes. A bequest or gift to a foreign
is deductible if the corporation meets the following general standards:
permits no private inurement to individuals (i.e.,
it is a nonprofit).
prohibits lobbying activity.
prohibits political activity.
was organized and is operated solely for recognized
charitable purposes that are "religious, charitable
(eleemosynary), scientific, literary or educational."
or bequests to trustees of charitable trusts for use
abroad or to foreign trusts
for charitable purposes abroad are also
generally deductible. The
regulations, however, prohibit a foreign charity from being
a qualified charitable remainder trust.
or bequests to foreign private foundations that receive
over 15 percent
of lifetime support from U.S. sources are not
exemption is obtained. Foreign private foundations with over
85 percent lifetime foreign
support are not required to apply and must generally comply
with private foundation distribution and other governing
order for a gift
to be deductible.
Generally, gifts to foreign governments are not permitted
unless limited to exclusively charitable purposes.
who are not U.S. citizens or domiciliaries are only
permitted a charitable deduction for gifts and bequests
the U.S. federal
and local governments,
domestic charitable corporations and other gifts to be
in the United States. Exceptions
to this rule, however, are found in estate and gift tax
treaties. Generally under a treaty, transfers at death
to a charity
in the decedent’s home country
have the same treatment as if they were transferred to
a U.S. charity. Exceptions are found under the following
Canada (income tax treaty), Denmark,
France, Germany, Greece and Sweden.
Status by Entity
Revenue Code (IRC) section 509, charitable entities
are classified as either “public
charities” or “private foundations.” How
and whether a U.S.-based charitable organization can
make foreign donations depends upon its tax classification.
charities generally receive support from a broad base
of contributors or payments for services related to
charitable goals and may make foreign expenditures
directly or through grants to individuals or
organizations. Any foreign activity must be within
the charitable objectives as a condition of exempt
a public charity must exercise sufficient control
of funds and ensure that funds are properly spent in
a foreign jurisdiction to avoid losing its tax exemption.
Public charities are not subject to excise taxes.
foundations do not receive broad support from the public
and are subject to statutory restrictions
requirements. They are also subject
to excise taxes on investment income and, under
section 4942, “qualifying
distributions” equal to five percent of
annualized assets for the prior year must be
made or the tax
rate on investment income is not eligible for
a reduced rate of tax (one percent). Foreign
are subject to a four percent tax (or lower under
treaty for Canada, Germany, Mexico and the Netherlands).
section 4945, penalty taxes may apply
if “taxable expenditures” are
made. Grants to individuals and to foreign nonpublic
charities may be considered taxable expenditures.
Private foundations must follow due diligence responsibilities
and exercise expenditure responsibility for foreign
charitable organizations that have not qualified for
tax exemption and a tax classification
because they have not established that they are
entitled to another classification as a public
avoid a “taxable expenditure,” U.S.
private foundations must determine that a foreign
entity qualifies as a public charity
(equivalent to a 501)
Exempt Status of Foreign Charitable Organizations
foreign charitable organizations should apply for U.S.
tax exempt status. Under
public charities) must apply or give notice
of intent to apply. U.S. tax exempt status
classification as a public
for exemption from U.S. withholding tax on
taxable U.S. source non-effectively connected
an 85 percent foreign
private foundation is exempt from application
requirements. But a foreign
may be reluctant
to be subject to IRS reporting rules, scrutiny
and possible excise taxes.
for Charitable Purposes Abroad
use of funds by an exempt organization outside the United
of a contributor's
considerations include obtaining and
retaining the tax exemption
and complying with other IRC
are not deductible if they are committed to go to a foreign
may make a deductible
gift to a U.S. charity to be used abroad;
however, the deductibility depends
upon the control
of the U.S. domestic
Rul. 63-252, the IRS addresses five arrangements
for gifts to be used
and determined their
part of a plan to solicit funds in the United States,
a foreign charity formed
a domestic organization to
conduct a fundraising campaign, pay the administrative
expenses and remit any balance to the foreign
organization. The IRS concluded
that the contributions were
residents formed a charitable organization within the
United States and drafted the
provide that it would receive contributions and send them,
at convenient intervals,
to the foreign organization. The contributions were
foreign organization entered into an agreement with
a domestic charity to conduct a fundraising
campaign on behalf of the foreign organization. The domestic organization
represented to prospective
contributors that funds would go to the foreign organization. The contributions
were not deductible.
domestic charity conducted charitable activities in
a foreign country. When its purposes could
be furthered by granting funds to a foreign charity, the domestic
organization made such
grants for purposes that it had reviewed and approved. The grants were paid
from its general funds,
although the organization solicited
from the public. No special
fund was raised by a solicitation on behalf of particular foreign organizations.
domestic charity conducted charitable activities in
a foreign country and formed a foreign
subsidiary to facilitate its operations there. The foreign organization
was formed for purposes
of administrative convenience and the domestic organization controlled every
facet of its operations.
past, the domestic organization
for the specific purpose of carrying out its charitable activities in the
and it planned
to continue to do so in the
future. Following the
formation of the foreign subsidiary, however, the domestic organization transmitted
for its foreign charitable activities
directly to that organization.
As above, the contributions are deductible.
Rev. Rul. 63-252, contributions to the
first three organizations were
not deductible because
the U.S. organizations
conduits to foreign
and had no control over use of
the funds. Contributions to the last two organizations were deductible
because the domestic
own charitable purposes by activities
they sponsored abroad.
for contributions to be deductible, domestic organizations
grants to foreign organizations
their own programs
they control the use of the
funds to insure that the monies are used solely
purposes. (See Rev. Rul. 75-65.)
IRS found that a domestic charity that gave funds to
redistribute for humanitarian
not sufficiently control
the contributions because
it did not choose the
ultimate projects or recipients.
In this case the contributions
charities may be formed as "friends of" organizations
in order to support specific foreign
organizations. Under Rev.
Rul. 66-79, the IRS spelled
out in detail the requirements
for a qualified "friends of" organization
and concluded that contributions
to such an organization are considered to be made to
a domestic organization and are deductible. Rev. Rul.
provides the blueprint
for creating and operating a qualifying domestic “friends
requirements are as
of charitable mission;
must specify powers of board to choose, approve, authorize,
control, as well
and absolute discretion;
to withdraw approval; and
disclosure and refusal to accept “earmarked
organization may solicit deductible contributions
use by specific foreign
organizations so long as they
are not required to turn
over the funds,
they retain discretion
over the use of
the contributions and they
follow approved procedures
establish formal grant application and review procedures.
materials should be monitored to ensure donors aware
materials should be monitored to ensure donors aware
that they are
to foreign organization.
accept earmarked contributions.
foundations can qualify; however, grant requirements
must be met.
Cassidy, CPA, is a senior tax director at BDO
USA with the Expatriate Tax Services Group in its
New York office. He has spent over 22 years in public accounting and over
Toronto and Mexico
City. Mr. Cassidy has
tax with an
emphasis on effective
expatriates and foreign national
investors and entertainers in the United States. He
has also managed international
for clients in diverse industries. Mr. Cassidy is a frequent speaker
and contributor of articles
for the NYSSCPA and the International Tax
the treasurer of the U.S.-Mexico Chamber of Commerce.
He can be reached at email@example.com or 212-885-7310.