Charitable Activities in a Foreign Country
The issue of a nonprofit operating in a foreign country is rather complex. It can involve multiple government agencies and be fraught with pitfalls that can only be avoided if you understand the rules. If you are like many of our clients who operate abroad, understanding the rules is critically important.
Foundation Group has worked with thousands of 501(c)(3) clients with charitable activities in foreign countries and continue to work with them every day… and each situation is different. First, it’s important to understand what type of activity is being conducted, the government agencies involved, and the necessary procedures required to stay compliant. For example, will your nonprofit be conducting direct activities, charitable giving, or both? Regardless, you will be working not only to satisfy the IRS like every other tax-exempt organization, but you will also be accountable to more specific U.S. Treasury requirements. Examples include the need to stay aware of the restricted countries as identified by the U.S. Department of State, and understand the acceptable financial transactions outlined for charitable work by a U.S. organization abroad.
Operating in a foreign country is not easy and takes way more than just making sure your passport is current. It comes with its own set of requirements and complexities. That doesn’t make it impossible, though. Let’s start with the ‘what’.
Direct activities are defined as domestic (U.S.) tax-exempt organizations operating some or all of their programs physically in a foreign country. There are many examples of this: schools, clinics, economic development programs, orphanages, etc. This can involve U.S. citizens living in and operating the program in the foreign country, a program fully staffed by foreign nationals, or a combination of the two. The biggest challenge in maintaining an IRS-compliant foreign country program is the same as for any 501(c)(3) organization, that is, the program must satisfy a charitable purpose. What is different is the ever-changing landscape of international relations and its effects on maintaining compliant oversight. More on that below.
This activity usually involves a U.S. charity financially supporting the efforts of a foreign charitable organization. This topic may seem straight-forward on the surface, but it is actually treated with greater scrutiny by the IRS than direct activities. An example of this might be a U.S. charity gives money to a poverty relief program based in Ecuador. In principle, this is OK, so long as the foreign country or agency doesn’t have any defined restrictions. The problem is the lack of direct fiduciary responsibility for the expenditure of funds by the U.S. organization. In our example, the U.S. charity must ensure that the program being supported qualifies as one that would be recognized as a 501(c)(3) if it were in the U.S. In addition, the U.S. charity must require a detailed accounting of the expenditure of funds in order to monitor compliance with 501(c)(3) related expenditures. Should the domestic organization find out that money is not being spent in a way that could be acceptable by the IRS, the donations to that foreign organization should cease immediately.
Also, the IRS will not allow a domestic charity to be simply a “money conduit” to a foreign organization. U.S. law does not allow such direct-affiliate organizations. In other words, a charity cannot exist for the sole purpose of financially supporting a specific foreign charity. A U.S. charity must be able to prove that it is sovereign from the foreign entity it’s giving to and that it is organized for specific charitable purposes that it alone is responsible for, one of which may be the support of charitable work. It is best when that support is not tied to any specific foreign charity on an exclusive basis. For a new organization it is OK to name the foreign charities to be supported initially, but it is often a mistake to make the support of those named charities the sole purpose.
As previously stated, the IRS isn’t the only area of the U.S. Department of Treasury that will be involved if your nonprofit decides to operate overseas. What we’re referring to is the Office of Foreign Asset Control. As explained at U.S. Department of Treasury’s Website,
The Office of Foreign Assets Control (“OFAC”) of the U.S. Department of Treasury administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the United States.”
In a nutshell, OFAC determines where you can and cannot go and who you can and cannot work with. While technically it is a Treasury Department program, Homeland Security is directly involved. It is imperative that any U.S. charity that intends to put programs in place in a foreign country know what OFAC is saying about sanctions and these Specifically Designated Nationals (SDN).
The Treasury Department and Homeland Security aren’t the only departments outlining restrictions. As of the publication of this article, the U.S. Department of State has identified the following countries as State Sponsors of Terrorism: Cuba, North Korea, Iran, and Syria. This designation requires specific licenses from OFAC that must be approved prior to any activity being conducted.
As we have discussed time and time again, the fiduciary responsibility always comes back to the organization and its board members. With this next level of complexity by operating abroad, one more government agency comes into play – the U.S. Department of Justice and the U.S. Attorney General. The DOJ not only required the IRS to expand on the questions asked during the 501(c)(3) application process for more accountability, the DOJ also works with OFAC to enforce the sanctions in place.
We say all of this not to scare you out of conducting charitable activities in a foreign country, but to reinforce just how heavily scrutinized the activity is to keep everyone safe in the name of national security. It is difficult enough to learn how to acclimate to a unique culture. You certainly do not need the headache of running afoul with any of these additional agencies.
Now that you know what type of activity is being conducted and who is involved, you need to know how to proceed to compliantly operate abroad. If you plan to conduct activity in a foreign country within the first three years of existence, you are required to answer the below questions on your Form 1023 application. And, yes, the IRS is particular about the answers.
- Do you or will you make grants, loans, or other distributions to organizations that are not recognized by the IRS as tax-exempt under section 501(c)(3) such as NGOs and other programs? If “Yes,” name and/or describe the non-section 501(c)(3) organizations to whom you do or will make distributions and explain how these distributions further your exempt purposes.
- Do you or will you make grants, loans, or other distributions to foreign organizations? If “Yes,” name each foreign organization, the country and region in which each foreign organization operates, any relationship you have with each foreign organization, and whether the foreign organization accepts contributions earmarked for a specific country or organization (if so, specify which countries or organizations).
- Do you or will you make pre-grant inquires about the recipient organization? If “Yes,” describe these inquiries, including whether you inquire about the recipient’s financial status, its tax-exempt status under the Internal Revenue Code, its ability to accomplish the purpose for which the resources are provided, and other relevant information.
- Do you or will you use any additional procedures to ensure that your distributions to foreign organizations are used in furtherance of your exempt purposes? If “Yes,” describe these procedures, including periodic reporting requirements, auditing guarantees, site visits by your employees or compliance checks by impartial experts, etc., to verify that grant funds are being used appropriately.
- Do you share board members or other key personnel with the recipient organization(s)? If “Yes,” identify the relationships.
- When you make grants, loans, or other distributions to foreign organizations, will you check the OFAC List of Specially Designated Nationals and Blocked Persons for names of individuals and entities with whom you are dealing to determine if they are included on the list? Describe any other practices you will engage in to ensure that foreign expenditures or grants are not diverted to support terrorism or other non-charitable activities.
- Will you comply with all United States statutes, executive orders, and regulations that restrict or prohibit U.S. persons from engaging in transactions and dealings with designated countries, entities, or individuals, or otherwise engaging in activities in violation of economic sanctions administered by OFAC?
- Will you acquire from OFAC the appropriate license and registration where necessary?
- Do you or will operate in a foreign country or countries? If “Yes,” name each foreign country and region within each country in which you do or will operate and describe your operations in each one.
- When you conduct activities in foreign countries, will you check the OFAC List of Specially Designated Nationals and Blocked Persons for names of individuals and entities with whom you are dealing to determine if they are included on the list? Describe any other practices you will engage in to ensure that foreign expenditures or grants are not diverted to support terrorism or other non-charitable activities.
Even if your programs change later in the nonprofit’s journey, you’re still accountable for OFAC compliance. You are not required to go back and re-file anything, but if your organization is ever audited, the burden of proof of compliance lies squarely on your shoulders – and these agencies do not take “I didn’t know” as an answer.
It goes without saying that conducting charitable activities in a foreign country comes with a lot of moving parts and a lot of accountability and scrutiny. It’s not a decision to be taken lightly. And that doesn’t even take into account any currency conversions from donations or program revenue that may have occurred during any direct activities. But that hasn’t stopped us from assisting thousands of nonprofits compliantly operate abroad… even with the what, who, and how complexities.
who subscribe to our free, email newsletter. It’s information that will empower your nonprofit!
This Post Has 24 Comments
I friend of mine is running a charity event in France. The purpose of this event is to raise funds to open a childcare that will operate in France. The association is registered in France. I know à US person that is willing to give some money, but he is asking for a 501c3. Is this feasible?
Thank you for your advices.
No, doesn’t sound like it. A French charity is just that…French. 501(c)(3) status is a US charitable designation. What the person is looking for is tax-deductibility for their gift, which is not available when giving to a foreign charity.
What is the best, tax-advantaged way to donate to a school in a foreign country?
You could set up a donor-advised fund, and donate into that, then direct giving from that to the foreign school. Just make sure the DAF sponsor allows distributions to foreign charities.
Wev are a 501(c)3 nonprofit organization our mission to help the elderly and the children of Lebanon can we send fund to a nonprofit organization in Lebanon and be compliance with the irs in the us. such of organization like St Vincent De Paul in LEBANON
If the nonprofit in Lebanon is doing verifiable charitable work, you should be able to financially support them. I recommend getting expenditure reporting from them afterward, if possible.
We are a church 501c3 and have made connections with a religious foundation in Pakistan that is working with orphans and digging clean water wells among other charitable things. We have had contact with them for a year, but other than email and chat, I do not have any other direct contact with this foundation and cannot “guarantee” they would meet the qualifications of a US 501c3. Am I correct in assuming that it would not be wise for our church to give funds to this foundation because of our 501c3 status, however, if individual people wish to donate to this foundation, they could do that on their own – it just may not be a deductible expense?
Late answer, but yes, you nailed it.
This is a very helpful article. I work for a US 501c3 and coordinate a partnership with an independent NGO in Thailand. The US 501c3 has recently changed policies and is now requesting any unused funds left at the end of the fiscal year be returned to them. Is that necessary and legal?
If the Thai NGO wasn’t independent, then yes, the US organization would be within legal rights to require that. I cannot say for certain whether it’s either of those, however, if your nonprofit is truly independent. The bigger issue is probably donor relations. Failure to honor the directives of a substantial contributor, assuming the directives do not violate any laws, could result in a loss of funding. I would suggest learning why they are requiring that and seeking to find common understanding about the entire situation.
Thank you for this valuable article. I know you barely touched the surface on this rather complex subject so I have a question.
We have 501c3 in the U.S and are currently purchasing land in Portugal to build a Silent Retreat. Attorneys in Portugal advised us to either Open a Branch or a Subsidiary reporting to the U.S parent company. It seems like incorporating a Foreign subsidiary gives the Subsidiary more independence from the parent company as opposed to a branch that is still very tied to the Parent company.
Just read your blog post on 501 (c)2 Subsidiary-
Is it a good idea to have the U.S Subsidiary under our 501c3 operate in a foreign country?
Which is easier for the IRS to deal with Foreign Branch Or Foreign Subsidiary?
Thanks in advance! Open to consulting with you guys as well
I honestly think there’s too much here to unpack accurately without knowing more, but I’ll tackle what I can. A 501(c)(2) won’t solve your issue, as it can only hold title to property, not operate a program. As to creating a separate entity in Portugal per your attorney’s suggestion, I’d have to know why they are saying that. It won’t help you stateside, but it may be advantageous there…I just don’t know what they know about that country. The issue becomes whether or not it is truly separate, or more of a technicality. You see this a lot where some countries require a charity to register an NGO in the foreign country. In many cases the NGO is fully controlled by the US charity from a leadership standpoint. Though it is legally separate, it’s really not separate operationally. In a case like that, the IRS will usually expect you to treat it as one entity for US reporting purposes. If the foreign NGO isn’t fully controlled by the US organization, then it truly is separate. Again, without more detail, it’s hard to say what’s best for you.
Thanks for your answer!
To give you a bit more context, we had set aside some funds in a DAF a few years ago that now we want to use to fund the project in Portugal through our U.S 501 (c)(3) …So donate the money to the U.S 501 (c) (3) and use that to fund the Foreign NGO there in Portugal.
We’re just trying to find the best ways to achieve this so I have been reading a lot of our articles to find the best setup for us.
Do you think a Private operating foundation works better in our case since it can be funded like a foundation but operate programs like a public charity?
How do they make sure that the foreign NGO isn’t fully controlled by the U.S?
for example, is it enough if the leadership team is different
You bring up two issues that are quite different, so I’ll try to answer both. First, I don’t recommend a private operating foundation if you’re planning to fund it partially from your DAF. DAFs are usually restricted to giving to public charities, so be careful there. Second, I’m not sure who “they” are in the last question. It can be advantageous to have the Portuguese org directly controlled by the US 501c3 by way of overlapping leadership. Again, not knowing the legal system in Portugal, it is very hard to advise directly on this.
Regarding the following statement in article which I accept: Can you direct me to an IRS reference on this?
“…the IRS will not allow a domestic charity to be simply a “money conduit” to a foreign organization.”
That concept is a summary of more than one concept, so I cannot quote for you a chapter and verse. However, the IRS requires all US charities to exercise fiduciary responsibility over charitable funds. That includes making sure expenditures to foreign charities are for purposes that would qualify under 501c3. Also, the IRS requires US charities to be governed independently from foreign control. Yes, a US charity can fund exclusively a foreign charity, but only if the US charity is independent and exercises expenditure accountability over the use of funds. At no time should the foreign charity have access to funds under the custody of the US charity until such time as a grant is made to them. Hope that helps.
Can a US 501c3 grant funds to a charitable trust in India for purchasing land there?
Probably, if the US organization can verify that the expenditure will satisfy a charitable purpose.
Thank you so much for this piece!
We are looking to implement a fundraising CRM system to share fundraising data between our US 503(1)(c) and UK registered charity. Could we do this and remain compliant with the US laws around US charities financially supporting/sharing information with a specific foreign charity?
Alternatively, would we need to have a different and independent CRM for our US charity, paid for by the 503(1)(c)?
I don’t think there’s anything wrong with sharing CRM data, but you cannot share funds nor give the UK charity direct access to the US charity’s funds. That’s the big issue. Data sharing isn’t prohibited in any way.
Thank you for your article. I have a Group Exemption 501c3. Would it be possible to set up one of the subordinates to actually operate in a foreign country (Brazil)? What we would we need to do in order to have a foreign 501c3 operating in another country – or is that even a possibility?
Thank you for your help!
~ tess bloyer <
You couldn’t have a truly Brazilian nonprofit operating as a group exemption subordinate of your organization. But, if it were a US-based nonprofit that operates in Brazil, that’s a possibility, assuming it otherwise qualifies to come up under your group.
Thank you! Very informative article.
What about what might be a more common issue, such as a U.S. non-profit paying a foreign national (a non-US citizen) for a service he performs for the organization? Is that acceptable (provided that the payment is documented of course, and the purpose for the payment is a necessary and permitted service performed for the U.S. non-profit)?
Yes, in most cases that is perfectly fine. It is very common for US nonprofits to have foreign staff on the ground at the location of services. Because the nexus of service is in the foreign country, and most often the worker isn’t qualified to work in the US were they here, there is no US employment tax concern. However, be aware of any employment rules and regulations in the foreign country itself. You certainly don’t want to run afoul of rules there.
Comments are closed.