5. The tax treatment of cross-border philanthropy
This chapter examines the tax treatment of cross-border philanthropy. It first considers tax incentives for cross-border giving: both donations and bequests; and also considers how gift and inheritance taxes apply and how capital gains tax might apply where the gift is non-cash. It then considers the tax treatment of philanthropic entities that operate across borders, examining whether tax relief is extended to foreign philanthropic entities operating domestically, and the tax treatment of domestic PBOs operating across borders. Finally, it considers the tax treatment of international grant-making by funds.
This Chapter considers the approach countries adopt in relation to cross-border philanthropy and tax. Cross-border philanthropy can occur where a person (and individual or corporation) makes a gift to an entity in another jurisdiction (‘direct philanthropy’). Cross-border philanthropy can also occur where a domestic entity operates in another in another jurisdiction or where a foreign entity operates domestically (‘indirect philanthropy’). This Chapter considers the tax treatment of both cross-border giving and cross-border operations by philanthropic entities.
The Chapter considers the extent to which countries provide tax incentives (deductions, rebates or matching) for giving to foreign philanthropic entities, either inter vivos gifts or gifts made on death (bequests). It also considers whether other taxes apply to the making of the gift i.e. gift taxes, inheritance taxes or, if it involves a transfer of property, capital gains taxes. Apart from the position in the European Union (EU) (that extends to countries in the European Economic Area (EEA)), that is governed by rulings of the European Court of Justice (ECJ), there is little tax support in other countries for cross-border giving. The position in the EU requires Member States to adopt a ‘comparability’ approach to ascertain whether a gift to a philanthropic entity in another Member State is entitled to tax relief. This may require a case-by-case approach to determine eligibility, and due to differences between Member States relating to tax relief, means that relief is not straightforward. There also appears to be less than complete adoption of the position in the ECJ rulings by all Members of the EU. Outside of the EU there are a few cases where there are limited tax incentives for cross-border giving. These limitations have led some philanthropic entities to establish ‘work arounds’ with entities in various jurisdictions, so that gifts can be made to domestic entities (that are eligible for tax relief) but are then passed on to entities in other countries.
This Chapter also considers whether tax relief is provided to entities that operate across borders – foreign philanthropic entities operating domestically, as well as domestic philanthropic entities operating, wholly or in part, outside the jurisdiction. Apart from the position in the EU, most countries do not provide tax relief for foreign philanthropic entities. The position in the EU is governed by ECJ rulings requiring Member States to adopt a ‘comparability’ test to determine the eligibility of an entity in another Member State for tax relief, and once again the position is complex. Beyond the EU, there are a few examples of other countries providing tax relief for foreign philanthropic entities on a case-by-case basis. The inability of foreign entities to qualify for tax relief has meant that many entities that operate internationally establish local entities that are eligible for tax relief. Many, but not all, countries provide tax relief to domestic entities that operate abroad, particularly where the activities are related to humanitarian relief or development assistance.
This Chapter proceeds as follows: Part 5.2 considers tax incentives for giving: donations and bequests; and also considers how gift and inheritance taxes apply and also how capital gains tax might apply where the gift is non-cash. Part 5.3 considers the tax treatment of philanthropic entities that operate across borders. This Part considers whether tax relief is extended to foreign philanthropic entities operating within the country, including any conditions that must be met for that tax relief. It then considers domestic PBOs, including domestic PBOs that are branches of international philanthropic entities, operating across borders. It also considers the tax treatment of the making of international grants by funds (grant-making).
Despite fairly widespread use of incentives for domestic philanthropy, the landscape for a more global approach to philanthropy remains fairly guarded. The issues that arise relate to:
incentives for individuals and corporations for the making of a cross-border donation;
incentives relating to cross-border bequests; and
other tax treatment of cross-border donations or bequests e.g. exemptions from gift taxes; inheritance taxes and, where property is disposed of, capital gains tax.
5.2.1. Incentives for cross-border donations
This section gives an overview of the tax incentives for cross-border donations. The focus of the section are the tax incentives that countries may or may not extend to corporate or individual donors that give to a foreign PBO operating abroad. For the majority of countries, cross-border donations are not incentivised as a general principal (see Table 5.1). However, certain specific situations allow for a subsidy, if the foreign entity meets a set of domestic and/or international requirements. This section will cover three different scenarios: donations within the EU/EEA; donations between countries with bilateral tax agreements; and countries with other specific regimes.
Apart from the position in the European Union, which applies to all members of the European Economic Agreement (EEA), the general position is that the relief available for donations to domestic philanthropic entities is not available for donations to foreign entities. Most countries limit the tax relief to donations to entities that are ‘in’, ‘formed in’, or ‘established in’ the jurisdiction or have some other connection to the jurisdiction. The nature of the connection required is important in determining whether tax relief is available and is discussed further below. Generally, the rules are the same whether the donor is an individual or a corporation, although Hungary only provides tax relief to corporations and Sweden only provides tax relief to individuals.
There are three situations where tax relief is available for donations to foreign entities: the first involves the Member States of the EU (and EEA) that are subject to rulings of the ECJ. The ECJ has developed a general non-discrimination principle relating to philanthropic giving (see Box 5.1). Second, some countries have bilateral agreements that permit cross-border tax relief. Third, some countries have a process for recognising foreign PBOs in limited circumstances and allowing tax relief for donations to those entities.
EU law
The EU Treaties provide for the free movement of capital between Member States and freedom of establishment. European Community law therefore requires Member States not to discriminate against a gift to a PBO in another Member State. This does not mean a gift to a foreign PBO will automatically benefit from the same treatment as a domestic PBO, it means that the nationality of a PBO is not sufficient to justify a difference of treatment. The ECJ in Hein Persche v Finanzamt Ludenscheid [2008] Case 318/07 (14 October 2008) (Persche’s case), stated that European Community law does not require Member States to automatically acknowledge a foreign charity status when granting tax relief to donations. However, where a taxpayer in one State (in that case Germany) makes a donation to an entity that has philanthropic status in its own State (in that case Portugal), the State of the taxpayer cannot deny the right of equal tax treatment solely because the recipient entity is not resident in its territory. In that case, Mr Persche, a German resident, claimed a deduction from personal income tax for an in-kind donation of bed and bath linen, walking frames, and other equipment. The donation was made in favour of a Portuguese PBO working on a number of social issues including providing care homes for the elderly. The ECJ did not go so far as to require Member States to provide mutual recognition of philanthropic entities, but rather required Member States to accord tax benefits when there was ‘comparability’, and in this case Germany had not considered whether the Portuguese PBO satisfied such a test. Following this, and other ECJ cases, the burden is on the taxpayer to prove that the entity would be entitled to tax relief in the Member State in question but for its establishment elsewhere; and if the taxpayer can prove this the authority must consider the evidence presented.
Almost all Member States have amended their legislation and/or procedures to recognise donations to comparable or similar entities in other Member States. A number of Member States assess comparability on a case-by-case basis which is often a time-consuming and costly exercise for taxpayers, including the requirement to provide translations of relevant documents. This approach typically requires individual donors to obtain approval, often from a regional authority, in each case; no record is retained, and no precedent is established. This is the case in Belgium, Bulgaria, Czech Republic, Estonia, Germany, Hungary, Latvia, Lithuania and the Slovak Republic, although in Belgium it is possible to obtain a Ruling that the foreign entity is comparable from the central authority. Other Member States require the philanthropic entity to demonstrate comparability and/or be registered in that State as well as in their home jurisdiction. This is the case in Austria, Finland, Ireland, Malta, Netherlands, Norway and Sweden. This approach has the advantage that once registered, other donors can rely on the registered status to support the tax relief. However, due to the difficulties of establishing comparability, very few entities are registered under this approach.
Determining whether a gift to a foreign entity is comparable is problematic because of the diversity of approaches to the question of tax relief for donations in the Member States. Differences between the jurisdictions that might be relevant include whether the gift is money or in-kind (Finland and Portugal only provide tax relief for cash donations) and whether the donor is an individual or corporation (as noted above, Hungary only provides relief for corporations and Sweden only provides relief for individuals). There may also be differences related to the eligibility of the entity: whether it is a PBO or a fund and the nature of its purposes (Austria, Germany, Finland, Malta and Romania have more limited purposes), how monies are disbursed including on overheads (Austria, Belgium, Estonia, Latvia and Lithuania all restrict the expenditure on ‘overheads’ in different ways). There are also differences relating to directors’ remuneration (most countries prohibit payments to board members, but Sweden does not), whether the entity engages in activities abroad (Germany imposes restrictions) and on timely disbursement of funds (Portugal and Sweden impose specific time limits while others require the monies to be expended in a ‘reasonable period’).
Some Member States impose additional requirements on foreign entities. For example, Latvia only provides relief in relation to Member States with which it has a Double Tax Agreement. The German tax legislation also requires that the activities of all philanthropic entities ‘either have to support individuals which have their permanent residence in Germany, or the activities could benefit Germany’s reputation’.
The Netherlands is the most open of the countries responding. The Netherlands makes no distinction between domestic and foreign entities, whether from the EU/EEA or elsewhere. Providing the entity can satisfy the requirements of the tax law, they are entitled to be registered and donors can claim deductions. These entities must be comparable and satisfy other requirements such as integrity requirements, to demonstrate that those involved with the entity are ‘fit and proper persons’.
Finally, it should be noted that some Member States (Portugal, Romania and the Slovak Republic) do not comply with the ECJ rulings.
Bilateral agreements
The second situation in which a donation may obtain tax relief when made to a foreign PBO is where there has been a bilateral agreement between countries to provide such relief. This is the case for the United States that has such agreements with Canada, Mexico and Israel. A similar provision applies in the treaties between the Netherlands and Barbados and between Mexico and Barbados.
The US-Canada tax treaty (1980) provides for limited cross-border deductions in certain circumstances. Article XXI allows US donors to deduct gifts to Canadian ‘registered charities’, subject to US percentage limitations, but the deduction can only be offset against Canadian-source income. The treaty also allows US donors a deduction against their US-source income for donations to Canadian colleges and universities attended by the donor or a member of the donor's family (again, subject to US percentage limitations). The treaty also provides for reciprocal charitable credit for gifts by Canadian residents to US tax exempt organisations that could qualify in Canada as ‘registered charities’ if they were Canadian organisations but the deduction can only be claimed against US-source income, (subject to Canadian percentage limitations). Gifts to US colleges or universities attended by the donor or a member of the donor's family are creditable against Canadian-source income (again, subject to Canadian percentage limitations).
A further issue is whether the Canadian charity will be treated as a private foundation or a public charity under US law – as these types of entities have different percentage limits i.e. the deductible donation is limited to a maximum of 50% of the donor’s adjusted gross income for public charities or 30% for private foundations. A Protocol to the US-Canada treaty recognises that Canadian law governing tax exempt status is materially equivalent to US law governing charities. Under the Protocol, the public charity status of a Canadian entity is now recognised by the United States, without a separate determination by the IRS or a requirement to lodge financial information by the Canadian entity, and vice versa.
The US-Mexico tax treaty (1992), also contains provisions allowing deductions for cross-border charitable gifts. Article XXII of the treaty allows income tax deductions to US donors for contributions to Mexican charities. The deductions are allowed only with respect to Mexican-source income and are subject to US percentage limitations. Mexican donors are allowed reciprocal deductions only against US-source income (subject to Mexican percentage limitations) for contributions to US charities. The responsibility for determining public charity status resides with the taxing authority of the nation in which the charity is organised. Although the deduction is limited to particular sources of income, the status of the foreign charity is recognised.
The US-Israel tax treaty (1995), Article 15-A, permits US donors to deduct contributions to Israeli charities against their Israeli-source income, but only if the Israeli charity would have qualified for tax exemption under US law had it been established there (a comparability test). The deduction is capped at 25% of Israeli-source ‘adjusted gross’ income for individual donors and 25% of Israeli-source taxable income for corporate donors. Israeli donors are permitted a reciprocal deduction against US-source income for contributions to US charities that would qualify for tax exemption under Israeli law if organised there. The deduction is limited to 25% of US-source taxable income.
Another example of bilateral relief can be found in The Netherlands- Barbados Tax Treaty (2006), and in the Mexico-Barbados Income Tax Treaty (2008). Article 22 of The Netherlands-Barbados Treaty provides that a contribution by a resident of State A to a charity in State B is deductible in State A where the competent authority of State A agrees that the entity qualifies as a charity in State A (i.e. it satisfies a comparability test). The Mexico-Barbados Treaty provides that a resident of State A can claim a deduction for a contribution to an entity that is a qualifying charity in State B. The competent authority in State A can consult with the competent authority in State B to ensure that the entity is qualified in State B (that is, there is mutual recognition).
The inclusion of a provision on charitable donations seems to be part of the tax treaty policy of Barbados. A similar provision on donations to charitable institutions is included in article 21 of the Barbados-Seychelles Income and Capital Tax Treaty (2007), Article 22 of the Barbados-Mauritius Income Tax Treaty (2004), and Article 23 of the Barbados-Ghana Income Tax Treaty (2008).
Specific recognition
There are also a few examples of countries that have a process for providing tax relief for gifts to approved foreign PBOs in limited circumstances, namely Canada and New Zealand. In Canada, a tax credit is available (to an individual) for a gift to a ‘qualified donee’. This generally means a registered charity, that is, a charity that is created in and resident in Canada. However, a foreign entity can become a qualified donee if it is:
a university outside Canada, the student body of which ordinarily includes students from Canada, that has applied for registration by the Minister, or
a foreign charity that has applied to the Minister for registration. The Minister may register, in consultation with the Minister of Finance, a foreign charity for a 24-month period that includes the time at which Her Majesty in right of Canada has made a gift to the foreign charity, if the Minister is satisfied that the foreign charity is:
(i) carrying on relief activities in response to a disaster;
(ii) providing urgent humanitarian aid; or
(iii) carrying on activities in the national interest of Canada.
There are currently only 4 approved foreign charities.
New Zealand also has a process for foreign PBOs to become approved donees. In such a case, an application is made to the Minister through the Inland Revenue Department (IRD) for approval and inclusion on a list in Schedule 32 of the Income Tax Act 2007 (NZ). The criterion for approval is that the money received must go towards at least one of these things:
relieving poverty, hunger, sickness, damages from war or natural disaster;
the economy of developing countries recognised by the United Nations; or
raising the educational standards of a developing country recognised by the United Nations.
Charities are specifically excluded from being listed if they form to foster or administer any religion, cult or political creed. There are currently approximately 120 listed charities.
The non-recognition of a foreign philanthropic entity does not preclude a foreign entity establishing an entity or branch in the other jurisdiction. Where an entity is set up in one country but will perform some or all of its activities in another country, the issue will be whether a domestic entity is allowed to undertake activities abroad. This is considered in Part 5.3.2.
Finally, it should be noted that in those countries such as the Slovak Republic, that do not provide tax relief for donations to domestic PBOs, such relief does not apply to cross-border donations.
Emergence of a non-discrimination principle
Historically, EU Member States did not grant tax privileges to foreign PBOs. Indeed, the general rule was that tax incentives were restricted to domestic PBOs and donors giving to domestic PBOs. However, this regulatory framework was overhauled by a series of judgements by the European Court of Justice (ECJ).
Between 2005 and 2011, these judgements developed a general non-discrimination principle as regards to tax law in the area of public-benefit activities. It has set the below-mentioned rules for Member States.
Design of the non-discrimination principle
It is at the discretion of Member States whether or not they wish to provide tax privileges for PBOs and their donors (1). Similarly, Member States are in principle free in determining the relevant conditions and requirements. Among admissible conditions, Member States may theoretically limit the beneficiary circle of PBOs’ activities to domestic citizens or persons living within the domestic territory (2). There is also no obligation of automatically granting a PBO status to an entity recognised as a PBO in another country (3)
However, limits to the Member States regulatory powers are established by the fundamental freedoms of the Treaty on the Functioning of the EU. Indeed, Member States may not exclude a foreign EU-based PBOs and their donors from eligibility for tax privileges if they fulfil all requirements for domestic PBOs (4). Moreover, it is not permitted that a Member State requires a PBO to undertake its philanthropic activities solely in its jurisdiction in order to benefit from a preferential tax treatment (unless there are compelling objective reasons for this). For example, Member States may not restrict tax benefits for donations strictly to domestic universities or laboratories (5)
Member States should carry out a comparability test to determine whether a foreign EU-based PBO meets the requirements of national tax law. Such tests are to be carried out by the national authorities and courts of the Member State concerned. (6). While conducting the comparability test, Member States may ask that a foreign EU-based PBO provides any document useful for the carrying out of the test (7).
Note: (1) ECJ, 27. 1. 2009 - C-318/07 (Hein Persche/Finanzamt Lüdenscheid). (2) ECJ, Stauffer, paras. 37f., 57, Missionswerk, para. 30 (3) ECJ Stauffer, para. 39; Persche, para. 48. (4) ECJ, Persche, para. 46, Missionswerk, paras. 30-31. (5) ECJ, Laboratoires Fournier, para. 23; or Commission/Austria, paras. 35-38 (6) ECJ, Persche, para. 49, Missionswerk, paras. 33-34. (7) ECJ, Persche, paras. 53-58.
5.2.2. Incentives for cross-border bequests
This section summarises the tax treatment of bequests to foreign PBOs (also referred to as cross-border bequests). Although a number of countries did not provide information on this issue, Table 5.2 suggests that countries that grant tax incentives to domestic philanthropic bequests also incentivise cross-border bequests to PBOs, although exceptions exist. These are predominantly members of the EU, and the responses indicate that the same comparability requirements that apply for donations would apply to bequests.
Canada states that in limited circumstances a cross-border bequest is possible. This would apply where the bequest is to a foreign universities or foreign charities approved under the Income Tax Act 2007 (Can) (discussed above) or where the US-Canada tax treaty provides comparable tax relief.
The survey asked whether different rules applied for bequests to funds rather than PBOs. There were no differences indicated.
5.2.3. Gift tax, inheritance tax and capital gains tax
This section provides an overview of other taxes that countries may levy upon cross-border giving. The taxes covered are gift taxes, inheritance/estate taxes and capital gains taxes. Although the approaches differ across countries, the majority of countries do not levy taxes on cross-border giving (see Table 5.3). Finally, this section provides examples of countries that do levy the before listed taxes on cross-border giving.
Many countries (22) do not levy gift taxes or inheritance taxes. In some countries that do not levy such taxes, a disposal of property could give rise to capital gains tax (5) or stamp duty (1).
The US provides an exemption from gift duty (s 2522(a) of the Internal Revenue Code) and from inheritance tax (s 2055(a) of the Internal Revenue Code) for donations and bequests that could apply to gifts to foreign PBOs.
European countries that do impose such taxes generally noted that an exemption may be available to other Member States, presumably on the basis of comparability. This is supported by the case of Missionswerk Werner Heukelbach eV v Belgium [2011] Case 25/2010,10 February 2011 (Missionwerk case). Missionswerk was a religious association and PBO registered in Germany. Mrs R, a Belgian citizen, who had lived her whole life in Belgium, died in 2004 in Belgium, having left her estate to Missionswerk. The Belgian regional tax authority applied inheritance tax at a rate of 80% on the amount Missionswerk was to receive. Missionswerk sought to have the reduced tax rate of 7% applied instead, which was the rate applied for legacies to resident PBOs. The Belgian tax authority rejected the request for the application of the reduced tax rate on the grounds that it was only to be applied to foreign EU-based PBOs in cases where the testator had lived or worked in the country in which the foreign entity was based. The ECJ ruled that legacies are protected under the free movement of capital and that a restriction on tax incentives would be permissible only in the case that the German PBO was not comparable to a Belgian PBO. The Missionwerk case means that revenue authorities in Member States are at least obliged to apply the comparability test – the practical difficulties of applying the comparability test, including that some States assess comparability on a case-by-case basis, have been discussed above.
Three countries appear have a gift tax or inheritance tax that might be imposed on the making of a donation or bequest to a foreign PBO: Switzerland, Greece, and South Africa. In Switzerland, in most cantons, gifts and bequests by Swiss residents in favour of foreign resident PBOs are subject to gift and inheritance taxes, unless a ‘reciprocity declaration is concluded with the country where the foreign charity is registered. Almost all Swiss cantons have so-called reciprocity declarations with France, and some of them with the US, Germany and Israel. Greece taxes bequests and donations to philanthropic entities at a lower rate, including where the entity is within the EU/EEA. In South Africa, the bequest is taxed in the hands of the recipient, so a foreign recipient may be beyond the reach of the domestic taxing authorities.
In countries that do not impose gift tax or inheritance tax, a donation or bequest that takes the form of a disposal of property may be subject to CGT. This is the case in Australia, Canada, Colombia, Israel and the Slovak Republic. Malta indicated that stamp duty may be payable on the disposal.
This section considers the tax treatment of philanthropic entities that operate across borders. This includes the tax treatment of foreign philanthropic entities engaging in activities in another country. It also includes domestic PBOs carrying out activities in other countries and funds transferring assets or, more commonly, making grants to PBOs or other entities in other countries. Although most countries do not provide tax preferences for foreign philanthropic entities, many countries do permit domestic tax-preferred entities to operate abroad in various situations.
5.3.1. Tax treatment of foreign PBOs
This section analyses the tax treatment of foreign PBOs that engage in activities domestically. An entity that was granted a PBO status in one country may engage in activities in another jurisdiction, which raises numerous tax questions related to the treatment of income arising from domestic sources. The section focuses on the following issues: the extension of the PBO status granted abroad, the test applied by domestic jurisdictions allowing for a preferential treatment of domestic income received by the foreign entity and the taxation of these incomes in cases where the foreign entity fails to meet domestic requirements
Table 5.4 shows whether countries provide preferential tax treatment to foreign PBOs operating domestically. Most European countries treat comparable philanthropic entities within EU/EEA in the same way as domestic entities. The requirement to accord comparable treatment arises from the ruling of the ECJ in Centro di Musicologia Walter Stauffer v Finanzamt München für Körperschaften [2006] Case-386/04, 14 September 2006 (Stauffer’s case). In that case, an Italian philanthropic entity awarded scholarships to young people from Switzerland, particularly those from Bern, to pursue studies in music. The entity owned a building in Germany from which it obtained rental income. Under German tax law this type of income was exempt from corporate tax for domestic philanthropic entities. However, the exemption was said to not be available to foreign philanthropic entities. The ECJ stated that European Community law does not require Member States to automatically acknowledge a foreign charity status. However, where an entity that has philanthropic status in its own State (in that case Italy), also satisfies the requirements in another State (in that case Germany), the Member State cannot deny that entity the right of equal tax treatment solely because it is not resident in its territory. The operation of the comparability test to cross-border donations and cross-border bequests has already been noted. Philanthropic entities deriving income in another Member State will need to satisfy the revenue authorities in the source jurisdiction as to comparability and this can be complex and costly. Three Member States, Ireland, Malta and The Netherlands, require registration of the relevant foreign PBO. The Netherlands is the most generous of all countries as it permits entities from any country to register provided it meets the eligibility requirements in the legislation. Belgium allows the foreign PBO to assess whether it is exempt from corporate tax on one of two criteria. The first criterion is that the PBO does not carry out operations of a for-profit nature. The exemption based on this criterion can be claimed by both domestic and foreign PBOs. The second criterion (which may enable a wider exemption) is that the PBO belongs to one of the privileged sectors enumerated by Article 181 of the Income Tax Code (for instance, education). However, this basis for exemption is only applicable to domestic PBOs.
A large number of countries (16) indicated that they did not provide tax concessions to foreign PBOs, including some Member States of the EU.
The remaining countries had some limited arrangements for recognition of foreign PBOs. For example, Indonesia has an arrangement that involves some foreign PBOs being granted a permit by the Central Government (see Box 5.2). Canada allows a foreign PBO to qualify as a ‘non-profit organisation’ if it meets the conditions under the legislation, specifically that it is not a charity and that it is organised and operated for social welfare, civic improvement, pleasure, sport, recreation, or any other purpose except profit. If it qualifies as a non-profit organisation its income will generally not be subject to tax but unlike a registered charity, it is not eligible to receive tax preferred donations. In Australia, a small number of foreign PBOs are approved by regulation as income tax exempt (but not as deductible gift recipients). The New Zealand revenue has the ability to approve foreign entities as tax charities, which means that they can become approved donees (see Part 5.2.1) and also eligible for tax exempt status. It is however necessary to have a strong connection with New Zealand, meet the requirements for registered charities, apart from residency and demonstrate that they are eligible for charity tax concessions in their home jurisdiction. This approval and inclusion on a list in Schedule 32 of the Income Tax Act 2007 means the foreign entity will be able to derive non-business income (i.e. passive investment income) and not be subject to income tax. They will, however, be subject to income tax on any business income in New Zealand if all of their charitable purposes are carried out overseas. As noted above there are currently approximately 120 listed foreign charities.
South Africa notes that foreign PBOs may establish ‘branches’ and the United States, allows the establishment of entities that are closely aligned with foreign PBOs e.g. as ‘friends of’ a foreign PBO (these types of entities are discussed in Part 5.3.2).
To the extent that a foreign PBO does not qualify as a tax-exempt entity, it would likely be taxed as a corporation. As a result of these limitations, many philanthropic entities establish separate entities in each jurisdiction to take advantage of the tax concessions available to domestic entities (see Part 5.3.2).
In Indonesia, a PBO status issued by another country will be verified by relevant ministries before the PBO gets an approval to operate in Indonesia. Foreign PBOs must obtain a principal permit and an operational permit from the Central Government
Obtaining of principal permit
The country issuing the PBO status has diplomatic relations with Indonesia
The PBO has a non-profit principle and worthy purpose
Obtaining an operational permit
The PBO needs a principle permit from the central government
It also need a written agreement with relevant ministries/ government agencies according to its operational field.
An annual work-plan with the relevant regional government is required
Source: Government Regulation No. 93 Year 2010
5.3.2. Tax treatment of PBOs that operate abroad
This section provides an overview of the tax rules concerning domestic PBOs engaging in activities abroad. Preferential tax treatment is usually granted to a PBO’s domestic activity and thus PBOs with activities abroad may risk losing its preferential tax status. In most cases however, responding countries allow a domestic PBO to conduct activities abroad. Typically, this authorisation is reliant upon the respect of worthy purpose requirements imposed by the national legislation, usually similar to requirements imposed to domestic PBOs. This forces the imposition of strong documentation requirements for PBOs in order to respect the national criteria. Some countries allow these requirements to be lifted in certain specific cases, such as the occurrence of a natural disaster or humanitarian crises.
The question is, of course, concerned with what the tax provisions have to say about operating overseas. There may in addition be other requirements or restrictions on cross-border financial flows or activities. For example, most countries have regulations aimed at illicit financial flows and anti-money laundering, including following FATF recommendations about not permitting monies to be transferred to high-risk countries.1 Many countries also have regulations aimed at foreign interference, including restrictions on contributions to political parties (Canada, United States) and in some cases restrictions on contributions to philanthropic entities (Hungary, India, and Israel). There may also be restrictions on fundraising, both domestically and internationally, that restrict the ability of philanthropic entities to operate abroad. For example, in Singapore, if funds are raised from the public, a permit is required, and the applicant has to apply at least 80% of the net proceeds of the funds raised within Singapore (and the donations will not be tax-deductible). The rule may be waived for private donations or for appeals in aid of providing immediate disaster relief. These non-tax restrictions may affect the ability of philanthropic donor or entities to transfer funds or engage in activities in other countries.
Most countries provide tax support to domestic PBOs to carry out activities in another country (see Table 5.5). Most countries indicated that the requirements for approval were the same for entities that carried out their activities abroad as those that operated domestically. Some countries indicated that there may be restrictions relating to purpose and some countries impose additional reporting requirements when PBOs operate abroad. It is also important to consider how philanthropic entities can permit donors to support overseas activities (‘indirect philanthropy’).
Purpose requirements
Countries that do allow domestic PBOs to engage in such activity typically require the PBO to meet the domestic worthy purpose requirement. For example, 17 countries indicated that the same purposes were relevant whether the entity would be operating domestically or overseas. In some other countries, the relevant purpose must be related to assistance for developing countries or to assistance following disasters. For example, the Slovak Republic notes that a donation for material humanitarian aid provided abroad is a deductible tax expense for the donor, if donated through the Ministry of Interior of the Slovak Republic (s 19(2)(u) of the Income Tax Act No 595/2003 as amended). Presumably such donations are tax exempt in the Slovak Republic. In Australia, a registered charity can establish a ‘developing country relief fund’ if the Foreign Affairs Minister has declared the country to be a ‘developing country’ and has approved the entity. There is also a provision for the Minister to recognise a ‘disaster’, including in countries other than developing countries, if the disaster develops rapidly and results in death, serious injury or other physical suffering of a large number of people, or in widespread damage to property or the natural environment. In India, if a charitable trust derives income from property held for a charitable purpose which ‘tends to promote international welfare in which India is interested’ and is applied to such purposes outside India, the income is exempt, subject to special approval processes.
In the case of natural disasters and humanitarian crises, some countries note special arrangements. For example, in Canada, the Canada Revenue Agency (CRA) has indicated that following a natural disaster, such as an earthquake or flood, many organisations want to provide immediate assistance and relief to those affected, and as a result, the CRA often receives applications from such organisations seeking to be registered. The CRA has indicated that it will typically assign priority to these applications. In Germany, in cases of natural disasters or humanitarian crisis the tax administration may publish a catastrophe decree (‘Katastrophenerlass’). These decrees allow entities with preferential tax treatment to collect donations for worthy purposes not set out in their constitutions. In Indonesia, the government permits tax relief for natural disasters, although it is not clear whether the disaster must be within Indonesia or whether it could be in some other country (Government Regulation No. 93 Year 2010). In New Zealand, a domestic registered charity must apply 75% of its funds within New Zealand, allowing up to 25% to be devoted to charitable purposes outside New Zealand. The Inland Revenue Department (IRD) indicates that if the figure is below 75% in any year, the cumulative total of its funds applied over the current and preceding two years can be used for the purposes of determining whether a tax credit or deduction is available. This allows some year-on-year variation for exceptional years, for example in response to natural disasters: IRD Interpretation Statement 18/05. Importantly the 75% requirement does not apply to foreign charities listed under Sched 32 of the Income Tax Act 2007 (see Part 5.3.1).
Additional requirements
Another group of countries, namely Australia, Canada, New Zealand and Switzerland, require the domestic entity to meet the specified worthy purpose but also to satisfy additional reporting requirements (documentation, justification of activity, proof of control of the activity abroad etc.). For example, in Australia domestic entities will only be approved to engage in activities abroad, whether on their own or in partnership with in-country entities, if they can demonstrate that the entity’s focus is on supporting development and/or humanitarian assistance activities in developing countries (under the Overseas Aid Gift Deduction scheme); that they have the capacity to manage and deliver overseas aid activities and that they have appropriate safeguards in place to manage risks associated with child protection and terrorism. Some other philanthropic entities that pursue activities abroad may be eligible for income tax exemption provided that the entity has a physical presence in Australia and ‘pursues its objectives and incurs its expenditure principally in Australia’. This does not mean that the beneficiaries must be in Australia. The requirement in Canada that to be tax exempt, the PBO must carry on its activities itself, does not prevent the PBO from entering into contracts with local providers or appointing a local agent, but it is important that the domestic entity retains direction and control over any intermediaries. Switzerland notes that there must be suitable documentation for activities abroad.
In Luxembourg, a PBO can carry out activities abroad as long as it does not do so exclusively and its main activities are domestic. If the PBO has a non-government organisation status (which is authorised by the Ministry of Foreign and European Affairs), it is able to carry out activities abroad more extensively.
In Italy, domestic PBOs can carry out activities abroad only if related to humanitarian aid. If a PBO gives funds abroad, the allocation is allowed only for a humanitarian purpose. In such a case, the domestic entity has to comply with additional accounting requirements, with reference to the accountability of the foreign beneficiary entity/institution and with reference to how the funds will be spent.
A few countries, such as Singapore and Romania, indicated that they do not provide tax relief to domestic PBOs that engage in activities beyond the borders of the country, although it appears that they may permit certain international philanthropic entities such as the Red Cross, World Vision or Oxfam to operate with tax relief available.
Indirect philanthropy
The restrictions on tax relief for foreign philanthropic entities, but widespread acceptance of domestic entities operating overseas, means that donors wishing to support overseas causes need to find a suitable domestic entity to make donations to. From the perspective of the philanthropic entity, there are essentially two models available for entities to raise funds in one jurisdiction and spend money or carry out activities in another jurisdiction:
the separate entity model; or
use of an intermediary.
Separate entity model
An entity that seeks tax-preferred status in a particular jurisdiction, perhaps with a view to fundraising in that jurisdiction, but carrying out activities in another jurisdiction, may set up a domestic PBO. The entity will, of course need to comply with the tax and other requirements of that jurisdiction. There are two types of this model – the international PBO and the specific purpose PBO.
Many international organisations, sometimes referred to as International Non-Government Organisations (INGOs), establish separate entities in different countries e.g. Red Cross, CARE, Amnesty International, Greenpeace, World Vision, Oxfam and Médecins Sans Frontiere, because of the inability to make tax-preferred gifts to foreign PBOs or for a foreign PBO to obtain tax relief. For example, there are 192 national Red Cross societies carrying out the work of the international Red Cross movement. The critical point is that the funds are to be used in a foreign country by a domestic entity as opposed to being donated to and used by a foreign entity.
Another type of cross-border PBO will typically relate to a particular purpose, perhaps an educational or arts-related purpose in another jurisdiction, but because of the inability of donors to obtain tax relief for cross border donations, the PBO will establish a separate entity in jurisdictions where potential donors may be located. For example, there are a number of entities in the US that support various museums and art galleries e.g. the Tate, Museo del Prado and the Rijksmuseum. There are also entities that support educational institutions, such as The University of Oxford – including in the US, Canada, Switzerland, Germany and Australia. In some countries the entity might be referred to as a ‘branch’ or ‘affiliate’ of the foreign entity, but will be treated as a separate domestic entity for tax purposes. Some entities will simply adopt a name that reflects the purpose e.g. the Oxford Australia Scholarship Fund. The US has a tradition of allowing US taxpayers to support overseas PBOs through a ‘Friends of’ PBO e.g. American Friends of Oxford University, and this nomenclature has now been adopted in Switzerland (Swiss Friends of Oxford) and Germany (German Friends of Oxford). South Africa permits a foreign organisation that is incorporated, formed or established in a country outside South Africa, which is exempt from income tax in that other country to obtain tax relief as a PBO. The critical point in each of these cases is that it is a domestic entity (and so subject to regulatory oversight) that will generate monies that will be passed onto the foreign entity in accordance with the stated purposes.
Use of intermediaries
An increasingly common phenomena is the use of intermediaries to transfer funds to a foreign PBO. A donor may be able to make a donation to a domestic PBO or fund that is authorised to make grants to foreign PBOs. It is likely that such entities will have to satisfy various requirements to be able to make grants overseas (see Part 5.3.3) and will need to have some oversight of the spending of the monies. Examples of intermediaries that operate in this way include the Charities Aid Foundation (CAF), Global Giving, Transnational Giving Europe and the King Baudouin Foundation.
Where a local intermediary is used to direct monies from donors to a nominated foreign PBO, the donation will get the benefit of domestic tax relief and the monies will be applied abroad in accordance with the donors’ wishes. In some cases, the intermediary may allow the donor to have an account (sometimes called a ‘Donor Advised Account’) and have some say about how the monies are to be applied. The domestic PBO or fund agrees to act as a ‘conduit’ and pass on donations to nominated foreign PBOs. This will typically generate a fee for the entity acting as a conduit (which is likely to be treated as business income of the recipient intermediary). For example, Transnational Giving Europe charges a fee equivalent to 5% of the donation up to EUR 100 000 and 1% above this, capped at a maximum fee of EUR 15 000.
Some countries have restrictions on philanthropic entities acting as conduits. For example, in Canada a PBO is required to carry on its charitable activities itself. If the purpose of a PBO was to raise funds for another entity, the PBO would not be entitled to registration as a charity. A Canadian foundation can make grants to other entities, but the entity would need to be a qualified donee. However, a Canadian PBO may enter in contracts with foreign entities, provided that the domestic entity ensures that the funds are applied for philanthropic or charitable purposes by the foreign PBO. This imposes an obligation on the PBO to take ‘reasonable steps’ to ensure that the funds are applied appropriately.
In some countries, the earmarking of a contribution by a donor for a particular entity or project may impact on the tax relief. For example, In the United Kingdom, tax reliefs are not available if the charity makes payments overseas unless the charity takes reasonable steps to ensure that the funds remitted overseas are not only intended for use for a purpose that would qualify as a charitable purpose according to UK law, but that the funds are in fact so used. Simply passing on monies to another entity is unlikely to satisfy this requirement. In the US, a donor cannot deduct a contribution made to a qualifying philanthropic entity if the contribution is directed to go to a foreign PBO (or some other entity). However, it may be possible to express a preference, rather than a direction, as to how the monies are to be used. In the US, the qualified entity must approve the program as furthering its own exempt purposes and must keep control over the use of the contributed funds. Simply passing on monies would not suffice. However, where the foreign entity is an administrative arm of the qualified US entity, a deduction will be available.
5.3.3. International grant-making
This section provides an overview of rules concerning international grant-making. Indeed, donations of assets or grants to foreign PBOs by a fund can have tax implications. While some countries support this form of cross-border giving, others may withdraw the tax-preferred status if grants are made to foreign PBOs.
Some countries indicated that funds were able to make grants to PBOs in other countries without losing their tax preferred status. The relevant countries are Austria, Belgium, Bulgaria2, Germany, Ireland, Malta, the Netherlands, Sweden and the US.
Although many countries have funds that make international grants, the US is home to some of the largest funds making such grants and accounts for a significant proportion of grants worldwide. According to a report by COF and Foundation Centre in 2018, ‘The State of Global Giving by US Foundations’, covering the period 2011-2015, private US foundations give around USD10 billion a year to organisations that work on social and environmental problems outside of the country, particularly in Africa, South Asia, and other low-income parts of the world. Since the early 2000s, international grant-making has increased from about 14 to about 30 percent of all foundation giving in the US, which itself has grown dramatically. Half of international giving comes from the Bill & Melinda Gates Foundation; the remainder is from other large foundations, which might be either independent, community, corporate or operating foundations. According to the report, the top 10 international grant-makers are:
1. Bill & Melinda Gates Foundation
2. The Susan Thompson Buffett Foundation
3. Ford Foundation
4. Foundation to Promote Open Society
5. The William and Flora Hewlett Foundation
6. Walton Family Foundation
7. The Rockefeller Foundation
8. The David and Lucile Packard Foundation
9. Open Society Institute
10. Silicon Valley Community Foundation
There are different types of recipients of these types of grants. Foundations may seek to build relationships with governments; or to support international NGOs or develop relationships with in-country NGOs (often referred to as ‘local partners’). The Council on Foundations and the Foundation Centre found that about 88% of all international grants went to or through INGOs.
The US Internal Revenue Service (IRS) imposes some restrictions on international grant-making by private foundations (i.e. foundations that are tax exempt under the Code), to ensure that grant proceeds will be used by the foreign grantee for appropriate charitable purposes. Private foundations may demonstrate compliance with such requirements through one of two methods: ‘expenditure responsibility’ which requires a level of oversight by the grantor, or ‘an equivalency determination’ that requires the grant-maker to form opinion that the foreign organisation it wishes to support is essentially the equivalent of a US s 501(c)(3) public charity.
US public charities may also make international grants and are generally not subject to the same restrictions on international grant-making as private foundations. A public charity must ensure that the foreign recipient of its funds engages in activities that are consistent with the public charity's exempt purpose. This invariably means having a grant agreement in place requiring progress reporting and return of the funds if they are used for an improper purpose.
Other countries indicated that a fund may lose its tax-preferred status if grants are made to PBOs in other countries. For example, in Australia an approved fund (which may be a Private Ancillary Fund or a Public Ancillary Fund) can only make grants to PBOs in Australia (although those PBOs may undertake activities in other countries, see 5.3.2).
Similarly, in Canada, tax-preferred charitable foundations are only allowed to gift funds to ‘qualified donees’ which are generally only situated in Canada. Foundations that donate assets or make grants to PBOs in other countries may have their registration temporarily suspended or revoked or be subject to a monetary penalty. However, foundations are able to carry out activities through intermediaries. This means that foundations can transfer funds to PBOs in other countries, provided that they maintain sufficient direction and control over their resources such that the activity can be considered their own.
In New Zealand, as is the case for PBOs (see 5.3.2), funds will lose their donee status (so donors will not be eligible for tax concessions) if monies are not applied ‘wholly or mainly to charitable, benevolent, philanthropic or cultural purposes within New Zealand’. This means that a maximum of 25% of funds could be applied to purposes outside NZ. These restrictions do not apply to foreign charities listed in Sched 32 of the Income Tax Act 2007 (see 5.3.1)
Colombia, Israel and Mexico indicated that funds that make grants abroad may lose their preferential tax treatment.