Giving Across International Borders, Part 2: Grants by Private Foundations

While philanthropic giving across borders by individuals is responsible for a significant portion of total giving, as discussed in Part 1 of this article, gifts from U.S. private and community foundations also play an important, and growing, role. These organizations awarded $8 billion in globally focused grants in 2019, compared with just $2.2 billion awarded in 2002, and the number continues to rise. International giving raises important questions for tax planning and compliance. Part 2 of this article explains what private foundations need to know about charitable grants to foreign organizations. 

Private Foundation Grants Across Borders

Tax considerations and compliance questions for grants by private foundations vary according to the type of organization receiving them.

Grants to domestic public charities

Grants by private foundations to qualified domestic public charities are permitted and do not require expenditure responsibility or other compliance. Grants by private foundations to organizations other than qualified domestic public charities are not permitted unless certain criteria are met. Compliance internationally can pose unique challenges.

Grants to foreign organizations

Private foundations are not permitted to make grants to foreign organizations, except under certain limited circumstances:

The foreign organization obtains U.S. tax-exempt status. To obtain U.S. tax-exempt status, the foreign organization needs to be organized and operated for purposes that qualify as charitable in the U.S. and seek qualification from the Internal Revenue Service as a public charity. Generally, a public charity must raise a substantial portion of its contributions from the general public or governmental entities (“public support”). Unless the foreign organization engages in fundraising activities and solicits donations from the general public, it would be difficult for it to qualify as a public charity. If the foreign organization is structured to so quality, it must apply to the IRS for tax-exempt status and, if granted, file a tax return with the IRS annually to confirm that it continues to meet the requirements.

The foundation obtains an “equivalency determination.” A private foundation can make grants to a foreign organization if the foundation has made a good-faith determination that the foreign organization is organized and operated as the equivalent of a U.S. tax-exempt public charity. To do this, the foundation must obtain current written advice from a qualified tax practitioner (attorney, certified public accountant, or enrolled agent) stating that the foreign organization is the equivalent of a public charity. The advice must be based on all facts and circumstances and cannot be based on unreasonable factual or legal assumptions. Often, the advice will rely on affidavits from the foreign organization about its operations and may require an affidavit from foreign legal counsel regarding the application of the local law to the organization. This equivalency determination must be made every other year based on current facts and financial data related to the foreign organization.

The foundation exercises expenditure responsibility. A private foundation can make grants to a foreign organization if the foundation exercises “expenditure responsibility” with respect to each grant to the foreign organization. This work involves several activities:

Pre-grant inquiry: Researching the officers and directors of the foreign organization to confirm that its management, activities, and practices would result in the grant funds being used exclusively for charitable purposes.

Grant agreement: Entering into a grant agreement with respect to each grant to the foreign organization outlining the specific charitable purposes for which the grants would be used, requiring that the funds be held by the foreign organization in a separate fund, mandating that any funds not used for the charitable purposes must be returned, and requiring that the foreign organization provide  annual reports on the use of the grant funds.

Reporting: Providing annual reports to the foundation describing the use of the grant funds for charitable purposes for each year until the grant has been fully expended. The foundation would then provide that information to the IRS on its annual Form 990-PF, Return of Private Foundation.

Re-granting: If the foreign organization intends to re-grant the funds to others, particularly individuals or non-charities, the private foundation will be subject to additional requirements for purposes of exercising expenditure responsibility.    For example, at least one private letter ruling indicates that if the foreign organization will make scholarship grants to individuals, the foundation must seek pre-approval from the IRS of the scholarship procedures to be used by the foreign organization. For re-grants to non-charities, the foreign organization would need to exercise its own expenditure responsibility procedures. Grant agreements would need to be tailored to ensure that appropriate measures are taken when re-granting occurs.

Grants via donor-advised funds

Many organizations sponsoring U.S. donor-advised funds will permit grants to established charitable organizations in foreign countries (and certain sponsoring organizations will permit grants to start-up organizations in foreign countries). If a foreign charitable organization is engaged in the type of programming a private foundation would like to support, the foundation could establish its own donor-advised fund with a sponsoring organization to receive grants from the foundation. The foundation would then recommend distributions from its donor-advised fund to the organization in the foreign country. It is best for the foundation to confirm in advance that the organization sponsoring the donor-advised fund would make grants to the foreign organization, as the sponsoring organization must engage in due diligence to confirm that the foreign organization is operated for charitable purposes.

Private foundations can make a powerful difference by supporting charitable organizations, both domestic and foreign. With the help of a trusted advisor and some careful planning, they can address all tax considerations and ensure compliance. Facing questions about your foundation’s charitable giving plans? Please reach out to Suzanne Shier, Robert LoPrete, or another member of LP’s Trusts & Estates practice group.