Global Impact: How Private Foundations Can Navigate Cross-Border Giving Regulations
As the world becomes more interconnected, private foundations are looking beyond borders to make a global impact. Expanding your philanthropic reach to include international causes can feel like opening a door to endless possibilities—but it’s not without its challenges. Understanding the various tax regulations and potential obstacles can make international giving seem complex at first. Still, with the proper guidance and preparation, international philanthropy enables you to pursue meaningful charitable work across borders, extending your impact to areas that need it most and contributing to positive change around the world.
Giving to international charitable organizations requires additional vetting that is not necessary when donating to U.S.-based public charities. One way to navigate these issues is if the foreign charity is officially recognized by the IRS as a U.S. public charity. However, most foreign charities lack the financial and administrative resources to undertake the expensive and time-consuming process of becoming a U.S. 501(c)(3).
Fortunately, there are still viable options for foundations wishing to make grants to foreign charities without U.S. 501(c)(3) status. U.S. tax law provides two solutions that allow for international grants: equivalency determination (ED) and expenditure responsibility (ER). Both methods allow for cross-border giving, with each being better suited to different scenarios depending on the specifics of the grant and the foreign organization. For example, ED is often preferred when flexible reporting is needed or when the foundation intends to start a long lasting relationship. However, ER can be more practical and cost-effective for smaller organizations or those unable to meet the documentation standards required for ED.
Equivalency Determination (ED)
Equivalency determination (ED) is when a private foundation determines if a foreign grantee is the equivalent of a U.S. public charity under 501(c)(3) of the U.S. tax code. To make this determination, the foundation needs a detailed affidavit from the foreign charity, a legal expert, or a qualified tax professional. IRS guidelines (Revenue Procedure 92-94) specify the required documents and information, which includes:
• Governing Documents: Copies of the organization’s charter, by-laws, or other key documents, with an English translation.
• Activities and Restrictions: A summary of the organization’s past, current, and future activities, along with a statement that it does not engage in non-charitable activities, attempts to influence legislation, or participate in political campaigns.
• Income and Assets: A statement saying the organization’s income or assets won’t benefit private individuals, except for fair compensation or purchases.
• Dissolution Plan: A statement that if the organization is dissolved, its assets will go to another nonprofit or charitable cause.
• Affiliations: A statement explaining any connections or control by other organizations.
• Financial Data: A summary of the organization’s finances for the past four years, including details about gifts, grants, contributions, membership fees, income from non-charitable activities, investment income, and public support percentages.
The information must be reviewed to determine if the foreign charity would qualify as a 501(c)(3) equivalent. If it does, ED is a great option for making international grants. Once ED is completed, the foreign charity doesn’t have to submit annual reports, and the foundation doesn’t need to provide additional information on IRS Form 990-PF. ED is especially useful for foundations that want to build long-term relationships with a foreign charity, as most of the administrative work is done before the grant is made, allowing for easier future gifts.
Challenges with ED
ED can help foundations create sustainable partnerships with foreign charities that meet IRS standards, but it’s not always an option. Some foreign charities struggle to provide the necessary documentation due to different accounting practices, local laws, or language barriers. In some countries, it’s difficult for charities to incorporate as nonprofit organizations, so they may register with different structures that don’t resemble U.S. based nonprofit entities. Even if these organizations have charitable purposes, they may not pass an ED review. In these cases, expenditure responsibility (ER) can provide a more workable solution.
Expenditure Responsibility (ER)
ER allows a private foundation to make a grant to a foreign charity, whether or not it meets the equivalency of a U.S. public charity under ED rules. The primary requirement under ER is that the grant is used for charitable purposes, and the foundation follows a specific set of guidelines, including:
• Conducting a pre-grant inquiry to ensure the grantee can use the funds properly and will follow the intended charitable purpose.
• Creating a written grant agreement that limits the use of the funds to their specific charitable purpose, and includes provisions requiring the grantee to repay any funds not used in accordance with the agreement.
• Requiring detailed annual reports from the grantee on how the funds were spent and the progress of the project.
• Ensuring the grantee maintains the funds in a separate account dedicated to the charitable project to ensure proper tracking and usage.
• Obtaining final reports from the grantee after the funds are fully expended or the grant is completed.
• Reporting the grant on the foundation’s IRS Form 990-PF, including details about the grantee, the purpose of the grant, and the foundation's compliance with ER requirements.
During the pre-grant inquiry, the foreign charity provides similar documentation to what’s required for ED, including legal status, governing documents, a list of board members, financial reports, and details about the organization’s mission. The goal is to confirm that the foreign charity is capable of using the grant properly. While this process sounds similar to ED, ER doesn’t require stringent tests about the foreign organization’s structure. It’s up to the foundation to decide if enough information has been provided that shows the potential grant will be properly used for a charitable purpose.
Once the pre-grant inquiry is done and the written agreement is signed, the grant can be made. The foreign charity must then submit annual reports to the foundation, stating how the funds were used, and this reporting continues until all the grant funds are spent or the grant is terminated. The final report should cover all expenses over the life of the grant. The foundation must ensure these reports are submitted and confirm the funds are still being used for their intended purpose. The foundation also needs to report this information on their annual Form 990-PF.
Conclusion
While international grantmaking can be complex, private foundations have two primary methods to ensure their donations to foreign charitable organizations remain compliant: equivalency determination (ED) and expenditure responsibility (ER). ED can be ideal for long-term partnerships, while ER offers greater flexibility for foreign organizations that do not meet ED’s criteria. By using these two options, private foundations can confidently extend their philanthropic reach globally, making a meaningful impact across borders.
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