The US is fairly easy place to do traditional business. We have far fewer restrictions on who may operate or own a business than other countries, and while there’s still progress to be made in streamlining regulatory compliance at multiple levels of government, it’s not always arcane.
But nonprofits are a little more trouble when the money and operations start to cross our borders. The IRS’s concern is that it’s easy to use insufficiently supervised overseas entities or operations to shelter income — by making tax -deductible donations from US income that, instead of being dedicated to a public and charitable purpose, find their way back into private pockets.
As with a for-profit company, one way to avoid some of the restrictions can be to establish the business in a new jurisdiction. Someone operating a foreign charity asked for some advice about incorporating a foreign nonprofit in the US.
First off, a few critical questions:
- Is there a foreign charity already in existence? Does it meet US rules about no private benefits?
- Is the goal of this exercise merely to solicit US donations that will be ax-deductible to donors?
- If the goal is indeed to form a new US charity, is that entity going to operate in the US or in the foreign country, or will it merely channel funds to the foreign organization?
Why do these questions matter? Donations to non-US charities are deductible only under specified circumstances. Grants by US charities are scrutinized under similar rules; foreign ‘operations’ by US charities are more flexible because the charity is subject to the same rules that govern its use of funds domestically.
A second way to approach the issue is to just solve the donation deductibility problem for the particular organization and operations (both must be compliant). I recently answered a question about how to make US-source donations to an international nonprofit.
In terms of straight funneling of money, Paypal is probably the easiest way, with a strong global web presence. If the question, however, is how to preserve the deductible nature of the donation for US taxpayers, then it’s a bit more complicated.
Certain foreign nonprofits are okay by US standards, and they can be found in Pub. 78. There are also special rules for certain Canadian and Mexican charities. Many US nonprofits operate programs in other countries either on their own or through properly supervised/reviewed programs. If one of those channels is available, it’s preferable (at least in terms of being easier) from a fundraising perspective.
Finally, a US organization can go through the process of qualifying a foreign organization based on rules and procedures set out by the IRS. It’s complicated under the best scenarios and complicated because the legal status of organizations is sometimes very different in other countries.
This qualification is not a mere paperwork drill; you should expect to conduct actual investigation and inquiries covering what actually happens in the foreign operations.