Deductions for foreign charitable giving

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Americans are very generous when the cause or persons to which they are donating touch their hearts.  This is not to suggest that emotional giving is generally a recommended strategy, but rather to recognize that the emotional component is a strong motivating factor and that such motivation can come from almost anywhere.

Tax-deductible charitable contributions are not permitted for donations directly to individuals or non-U.S.-based charities. But U.S. citizens are often motivated to provide support regardless of whether their donations are deductible, and there are numerous crowd-funding websites through which such contributions are facilitated. These websites often contain fundraisers acting for actual U.S.-based charitable organizations in addition to individuals attempting to raise funds for personal needs, to help friends and neighbors, and to finance business start-ups. Donations that are made via fundraisers for actual charities are deductible, but all other contributions are generally considered to be personal gifts and, therefore, non-deductible.   

There are many good causes outside the United States that motivate interested donors to provide support, and tragedies seem to provide the strong emotional element that can generate numerous donations even when direct giving precludes taking a tax deduction in relation to the donation. Recent examples would include the Russian invasion of Ukraine, the historic flooding in Germany and Belgium, the earthquake in Haiti, Typhoon Rai in the Philippines, and the fire that destroyed the roof of Notre Dame Cathedral in Paris. Ongoing crises can also garner support for needs such as the ongoing drought in Sudan or rainforest destruction in South America.

Individuals wishing to donate to organizations that advance charitable causes around the world can simply make direct international donations to those foreign organizations. However, as noted above, only U.S.-based charities are eligible to receive tax-deductible charitable contributions from U.S. taxpayers. Therefore, donations by U.S. taxpayers to support charitable foreign causes are not generally deductible on those taxpayers’ tax returns, even if they are made to organizations that are recognized charities within those countries.

Opportunities for international philanthropy

The rules and restrictions on giving internationally are not the same as giving domestically, but U.S. taxpayers do have certain opportunities for international philanthropy while still potentially receiving certain tax benefits.

Aside from direct international donations to foreign charities (and receiving no tax deduction), U.S. donors can make deductible donations to fund international charitable work in the following ways:

• Donations to U.S. charitable organizations that maintain philanthropic operations in one or more foreign countries;
• Donations to a foreign charity that is established as a subsidiary of a U.S. charity; or
• Employ either a private foundation or a donor-advised fund (DAF) to make grants to foreign charities.

Charities with foreign operations

LU.S. charities are not prohibited from conducting part or even all of their charitable activities outside the United States. Many disaster-focused organizations are set up to operate anywhere in the world where a disaster occurs. Other charities, typically referred to as "friends of" organizations, may dedicate all of their support for a specific foreign-based cause or need (e.g., community wells in rural Africa) or a specific foreign cultural institution (e.g., rebuilding Notre Dame Cathedral in Paris).

Since the charity receiving the taxpayer’s donation is U.S.-based, the taxpayer’s contribution will generally be tax-deductible. However, there will be a problem if the IRS perceives the “friends of” organization to be nothing more than a conduit to flow money to a foreign organization. The charity must maintain certain levels of discretion and control over the donations it receives, without which the organization will not be operating consistent with its tax-exempt status and could have its status revoked.

Adequate control and discretion over the use of the contributions, as well as approved procedures for remitting funds abroad, generally requires that:

• The U.S. organization must have a charitable purpose that meets the requirements of Code Sec. 501(c)(3) and is broader than simply funneling money to a particular foreign charity;
• The issuance of grants must be made solely within the exclusive power and absolute discretion of the “friends of” organization, and never at the direction of the recipient foreign organization;
• All grants and contributions should match the domestic organization’s stated exempt purposes under Code Sec. 501(c)(3);
• Grants to the foreign organization should be made in support of specific philanthropic projects that the domestic organization has reviewed and determined to be (1) in furtherance of its own charitable purpose and (2) in compliance with the rules and regulations of the Internal Revenue Code;
• The “friends of” charity should receive and review periodic accountings of how its continuing financial support is furthering the charitable purposes and specific projects for which the funds were granted; and
• Provide donors with facts regarding how their donations were being expended by the foreign charity, and make clear to donors that their donations might not be distributed to the expected foreign charity if the organization determines that foreign charity is failing to use the funds in a manner that supports the organization’s charitable purposes.

Foreign subsidiary charities

Depending on the foreign jurisdiction, a U.S. charity may be able to form a subsidiary charitable organization within that country that is qualified to receive contributions that are deductible for income tax purposes in both the United States and that foreign country. To accomplish this, the U.S. charitable organization must form a subsidiary foreign corporation and then apply to the appropriate governmental entity for recognition as a charitable organization under the laws of that foreign country. If approved, and if it is permissible under the laws of that nation, the foreign subsidiary would then need to file an election with the IRS to be "disregarded" for U.S. tax purposes.

This election will permit the foreign subsidiary to be treated as a branch or division of the U.S. parent charity rather than as a separate legal entity. As such, donations to the foreign subsidiary charity would be considered donations to the U.S. parent charity for U.S. tax purposes. And, as an additional benefit, the donation will also be considered a donation to one of the foreign country’s charities for that country’s income tax purposes.

Grant-making intermediaries

Donor-advised funds (DAFs) and private foundations can be employed as grant-making intermediaries to deliver donations in the form of grants to foreign charities. The private foundation or DAF will need to either:

• Exercise expenditure responsibility with respect to the grant, or
• make a good-faith equivalency determination that the foreign charity is the equivalent of a U.S. public charity.

An excise tax is imposed on private foundations if they make taxable expenditures, which includes grants to organizations except public charities and exempt operating foundations, unless the foundation exercises expenditure responsibility with respect to such grants in accordance with Code Sec. 4945(h). To exercise expenditure responsibility, the foundation or DAF must exert all reasonable efforts and establish adequate procedures:

• To see that the grant is spent solely for the purpose for which it was made;
• To obtain full and complete reports from the grantee on how the funds are spent; and
• To make full and detailed reports regarding the grants to the IRS.

In addition, the foundation or DAF should generally enter into a written agreement with the foreign charity that requires the return of any grants used in a manner inconsistent with the stated purposes for which the grant was made.

When the requirements of expenditure responsibility are not possible, the foundation or DAF may alternatively make an equivalency determination that concludes that the foreign charity in question is the equivalent of a U.S. public charity. 

Conducting an equivalency determination requires the foundation or DAF to collect detailed information regarding the foreign charity’s finances, organization and governing documents, and activities, and then obtain the opinion of legal counsel that the foreign charity is, in fact, the equivalent of a U.S. public charity. Some larger, established foreign charities may already have been involved in previous equivalency determinations for other U.S. entities, in which case the process may be streamlined. But an equivalency determination created from inception can consume considerable time and resources, depending on the foreign jurisdiction involved.

Because foreign charitable giving is not as simple as domestic giving, especially for taxpayers hoping for an associated deduction, care and planning is advisable. Taxpayers who want to itemize their charitable contributions as deductions on their Schedule A should ensure they are donating to an eligible charity by doing a search on the “Tax Exempt Organization Search” (TEOS) tool available at IRS.gov, or have such proof provided by the grant-making intermediary they choose. These extras steps are not especially onerous and can have a significant impact for those taxpayers who itemize their charitable deductions.