Nonprofit Law Resource Library
- Private Foundations
American nonprofits often are interested in supporting projects, programs and organizations that are based outside the U.S. Although private foundations are subject to some restrictions on international grantmaking, they may fund foreign grantees with less difficulty than might be expected. The IRS simply wants foundations to have a reasonable basis to conclude that the grant proceeds will be used by the foreign grantee for an appropriate charitable purpose, as they would be if granted to a domestic charity. Such a reasonable basis will exist where a private foundation funds a foreign grantee using one of three methods: (i) making a grant to a U.S. “friends of” organization that supports the foreign grantee; (ii) exercising “expenditure responsibility” over the foreign grant; or (iii) doing an “equivalency determination” to show that the foreign grantee is similar to a U.S. public charity.
- "Friends of" Organizations
A “friends of” organization is a U.S. nonprofit that is set up to receive contributions in the U.S. and to expend the funds in support of a foreign charitable organization. Making a grant to a “friends of” organization that is recognized by the IRS as a public charity is the simplest way for a private foundation to fund a foreign grantee, as it requires no special paperwork or administration. But the “friends of” organization cannot simply function as a conduit or pass through group allowing the foundation to make a grant it otherwise could not make without oversight. The “friends of” group must have a high degree of discretion and control over the granted funds, preventing the foundation from earmarking a grant to pass directly to a foreign grantee without intervening scrutiny by the “friends of” group.
The key to legitimacy of a “friends of” group is its ability to make final, binding decisions as to the expenditure of grant funds. A “friends of” group that itself takes responsibility for evaluating and monitoring the foreign grantee, and has the ability to decide not to pass on the foundation’s funds in the event it finds a particular foreign grantee inappropriate for any reason, will have the requisite amount of discretion and control. Similarly, an American “friends of” group that forms a subsidiary in another country to facilitate its tax-exempt activities in that country will have a sufficient degree of discretion and control. A mere conduit entity formed by a foreign organization in the U.S., on the other, would be unlikely to be in full control of the grant funds. Likewise, an organization formed in the U.S. for the sole purpose of raising funds and transmitting them to a particular foreign charity without more would not have sufficient discretion and control. If a foundation wishes to make a contribution to one of the latter two types of organizations, or to earmark a grant to go directly to a foreign charity, it must follow one of the procedures described below.
- Expenditure Responsibility
A private foundation may make a grant to a foreign organization, whether it is a charity or not, if the foreign organization intends to use the grant funds to carry out activities that will further the exempt purpose of the foundation, and the foundation follows a set of oversight procedures known as “expenditure responsibility.” Expenditure responsibility entails the following five basic steps:
Making a "pre-grant inquiry": The foundation must conduct a pre-grant inquiry by providing the potential foreign grantee with a list of questions designed to determine how the grant funds will be spent and accounted for, including details about who will oversee projects, how, where and when they will be carried out, etc.
Executing a written grant agreement: The foundation must have the foreign grantee sign a contract containing specific terms required by the IRS that limit and restrict how the funds may be spent and monitored, and under what circumstances they must be returned.
Requiring Reports: The foundation must require the foreign grantee to provide written, periodic reports on how the grant funds are being spent.
Requiring a separate account: The foundation must see that the foreign grantee maintains the grant funds in a separate, dedicated account.
Notifying the IRS: The foundation must notify the IRS (via its informational tax return on Form 990-PF) that it has made a grant for which it is exercising expenditure responsibility.
Although the details will vary with specific circumstances, as long as a foundation complies with the foregoing basic steps, it has the freedom to provide funding to charitable activities all over the world.
- Equivalency Determination
Another option for the foundation that wishes to fund international activities directly is to make a determination that the foreign organization it wishes to support is essentially the equivalent of a U.S. 501(c)(3) public charity. This may be done by seeking an opinion of counsel from an attorney or by having the potential foreign grantee fill out an affidavit. The affidavit is designed to elicit all the information about the foreign grantee that would enable the IRS to determine whether it would be granted tax-exempt, public charity status if it were to apply. The information required is fairly extensive and includes financials for the current and previous years, governing documents, details about the board of directors, descriptions of programs and activities, etc. Note that the affidavit must be completed in English and supporting documentation, such as the potential grantee’s articles of organization and bylaws must be translated into English.
In determining whether to exercise expenditure responsibility or do an equivalency determination, foundations should consider that the latter requires more investigation and work up-front, while the former requires more on-going attention. If the potential grantee cannot provide the information necessary for the equivalency determination, the foundation will have no choice but to exercise expenditure responsibility.
- "Friends of" Organizations
- Public Charities
U.S. public charities are not subject to the same restrictions on international grantmaking as private foundations, though many proceed as if they are as a precautionary measure. The only real limit on a public charity in this context is that the foreign recipient of its funds must engage in activities that are consistent with the public charity’s exempt purpose. It is advisable for the sake of clarity in the grant relationship and good business practices in general that the charity take the additional step of putting a grant agreement in place requiring progress reporting and return of the funds if they are used for an improper purpose.
- International Grantmaking Resources
- Council on Foundations' site on International Grantmaking
- Council on Foundations – International Grantmaking Resources
- IRS letter on International Grantmaking Procedures
- The Tides Foundation's International Grantmaking Services
- The Grantsmanship Center - International Funding Resources
- The Foundation Center - International Grantmaking Resources