Q&A #161 – Can a foreign nonprofit organization qualify for 501(c)(3) status?
Question: I manage an NGO in Europe that is planning to expand its fundraising efforts to include contributions from United States donors and foundations. Are organizations formed outside of the U.S. eligible for 501(c)(3) status or are we required to form a separate entity in the U.S. to be approved for 501(c)(3) status?
Answer: Charities formed outside of the United States may qualify for 501(c)(3) status so long as they satisfy the requirements that apply to 501(c)(3) organizations under U.S. law. This status makes it easier for foreign organizations to receive grants from U.S. private foundations and mitigate or avoid U.S. income tax on revenue received from U.S. sources. However, donors generally cannot use the charitable deduction under U.S. tax law for contributions made to organizations formed outside of the U.S., so many foreign organizations form affiliated “friends of” organizations in the U.S. for this reason.
One of the main reasons a foreign organization might consider applying for 501(c)(3) status is to facilitate receiving grants from U.S. private foundations. As explained in Q&A #86, U.S. tax rules make it difficult for private foundations to make grants directly to charities that were not incorporated or otherwise formed in the U.S. unless: (1) the foreign organization is recognized by the Internal Revenue Service (IRS) as a 501(c)(3) public charity; or (2) the foundation obtains an opinion letter from a qualified tax practitioner that the foreign organization is equivalent to a U.S. 501(c)(3) public charity. Consequently, obtaining 501(c)(3) status can open the doors for a foreign organization to receive grants from private foundations that might otherwise be hesitant to give.
However, this process is not without complications. To obtain 501(c)(3) status, most foreign organizations must submit a Form 1023 application to the IRS, although there are limited exceptions for charities from certain countries like Canada under tax treaties with the United States. Note that organizations that are formed outside of the United States are not eligible to use the Form 1023-EZ. The application must demonstrate compliance with the organizational and operational requirements of 501(c)(3) status, and English translations of the organization’s formation documents must be included to show that the documents have the specific purpose and dissolution language required under U.S. law. It can be challenging to balance these requirements while complying with local entity formation laws that may be quite different from those governing U.S. nonprofits.
Additionally, while a charity or NGO formed outside of the U.S. may be able to qualify for 501(c)(3) status, this status does not generally confer the ability to receive donations that are eligible for the charitable deduction under U.S. tax law. Subject to limited exceptions related to tax treaties between the U.S. and Canada, Mexico, and Israel, only contributions to 501(c)(3) organizations formed in the U.S. are eligible for the charitable deduction.
Planning Tip – Foreign charities and NGOs should verify applicable banking requirements, tax forms, and other necessary documentation well in advance of any commitments to receive funds from United States grantors and donors. Cross-border transfers of funds can raise numerous legal and regulatory issues, and failure to give sufficient advance consideration to these requirements can lead to unexpected disruptions and delays.
For these reasons, many foreign organizations instead choose to incorporate an affiliated organization in the U.S. under applicable state law for the purpose of raising funds to support the foreign organization’s projects (often referred to as a “friends of” organization). These arrangements are subject to other complex requirements, but when done correctly can more efficiently and effectively facilitate the acquisition of contributions from U.S. donors.
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