How Can a Foreign Nonprofit Raise Tax-Deductible Donations in the U.S.?
For many nonprofits, ministries, churches, schools, and charitable organizations operating outside the United States, American donors represent an important opportunity for growth.
Perhaps your organization already has supporters in the U.S. who want to give. Maybe American churches or foundations are interested in supporting your work. Or perhaps your organization is ready to intentionally build a donor base in the United States.
That often leads to an important question: How can a foreign nonprofit receive tax-deductible donations from U.S. donors?
The answer is not as simple as opening a U.S. bank account or registering your existing organization in the United States.
Generally, donations made directly to a foreign organization are not deductible for U.S. federal income tax purposes, although limited exceptions exist under certain tax treaties.
For organizations that want to build a long-term fundraising presence in the United States, that means the legal structure matters.
Why Donations Directly to a Foreign Nonprofit Are Usually Not Tax-Deductible
U.S. donors do not receive a federal charitable tax deduction simply because the organization receiving their donation is recognized as a nonprofit or charity in another country.
Generally, deductible charitable contributions must be made to an organization that qualifies to receive deductible contributions under U.S. tax law. A nonprofit's charitable status in Brazil, Kenya, India, the United Kingdom, or another country does not automatically make donations to that organization deductible on a U.S. donor's federal income tax return.
There are limited exceptions involving certain organizations under U.S. tax treaties, but those exceptions do not provide a general solution for most foreign nonprofits seeking U.S. donors.
As a result, international organizations that want to develop a meaningful U.S. fundraising strategy often need to consider a different structure.
Can a Foreign Nonprofit Just Apply for 501(c)(3) Status?
This is where the issue becomes more complicated.
A foreign organization can qualify for recognition of tax-exempt status under Section 501(c)(3) if it meets the applicable requirements. However, obtaining recognition under Section 501(c)(3) does not generally make contributions to a foreign-formed organization tax-deductible for U.S. donors. Limited exceptions may apply under certain U.S. tax treaties.
For organizations primarily interested in developing tax-deductible giving in the United States, simply obtaining IRS recognition for the existing foreign entity may therefore not accomplish the organization's fundraising goal.
Instead, organizations often explore establishing or working with a U.S.-based charitable organization.
The appropriate approach depends on the organization's fundraising plans, governance, relationship with U.S. supporters, and long-term goals.
One Option: Establishing a U.S. Nonprofit
One approach is to establish a nonprofit corporation in the United States and seek recognition of tax-exempt status under Section 501(c)(3).
That U.S. organization can pursue charitable purposes that include supporting work outside the United States. Once properly established and recognized, eligible contributions made to the U.S. organization can generally qualify as charitable contributions under U.S. tax law.
But there is an important distinction: The U.S. nonprofit must actually function as a U.S. nonprofit.
It cannot exist solely as a bank account or fundraising conduit that automatically transfers every donation to the foreign organization.
The U.S. organization needs appropriate governance, a board that fulfills its responsibilities, financial oversight, corporate records, required filings, and meaningful control over how its charitable resources are used.
For some international organizations, this type of U.S. presence is commonly structured as a Friends Of Organization.
What Is a Friends Of Organization?
A Friends Of Organization is a separate U.S. nonprofit established to support charitable work associated with a foreign nonprofit, ministry, school, or other organization.
Although the U.S. and foreign organizations may share a mission and work closely together, they are legally separate organizations.
That distinction matters.
The U.S. organization must maintain appropriate independence and exercise genuine oversight over its funds. Donations received by the U.S. organization cannot simply be treated as funds that are automatically owed or required to be transferred to the foreign organization.
Instead, the U.S. nonprofit must retain appropriate control and discretion over its charitable funds and determine how those funds will be used in furtherance of its own exempt purposes.
That may include making grants to the foreign organization to support qualifying programs, but the U.S. organization remains responsible for appropriate oversight.
A U.S. Nonprofit Cannot Simply Be a Pass-Through
This is one of the most important concepts for international organizations to understand.
Imagine a nonprofit operating in another country creates a U.S. organization solely so American donors can receive tax deductions. Every dollar the U.S. organization receives is automatically transferred to the foreign nonprofit, and the foreign organization decides how all of the money will be spent.
That arrangement can create serious problems.
The U.S. organization must retain control and discretion over the charitable funds it receives. Its board must be able to evaluate proposed uses of funds, make independent decisions, and ensure that funds are used consistently with the U.S. organization's charitable purposes.
That does not mean the two organizations cannot have a close relationship. In many cases, they do.
But the U.S. organization cannot exist merely to collect tax-deductible donations on behalf of the foreign organization.
What Happens to Donations After the U.S. Nonprofit Receives Them?
When a U.S. nonprofit supports charitable work overseas, it remains responsible for ensuring that its resources are used for appropriate charitable purposes.
Depending on the arrangement and the type of U.S. organization involved, appropriate oversight may include reviewing proposed projects, conducting due diligence, using written grant agreements, requiring reports, documenting expenditures, and monitoring how funds are used. Private foundations are subject to additional rules when making certain grants to foreign organizations.
The exact procedures will depend on the structure of the organizations and the nature of the international activities.
This is why creating the U.S. entity is only part of the process. Organizations also need a compliant system for moving funds from the United States to international programs.
Is a Friends Of Organization the Only Option?
No.
A Friends Of Organization can be a useful structure for an international organization seeking to develop long-term U.S. fundraising, but it is not the only possible approach.
Depending on the organization's goals, another option may include working with an existing U.S. charitable organization that is willing and legally able to support the international work.
Some organizations may also consider establishing a U.S. branch or another type of presence in the United States.
However, these structures do not necessarily accomplish the same legal or fundraising objectives. The tax treatment of contributions depends in part on how the organization is legally formed and structured, not simply on whether it maintains a presence in the United States.
The right structure depends on what the foreign organization is actually trying to accomplish in the United States.
Before Creating a U.S. Nonprofit, Ask What You Actually Need
Forming a U.S. organization can be valuable, but it also creates ongoing responsibilities.
Before moving forward, international nonprofit leaders should consider:
- How much fundraising do we realistically expect to conduct in the United States?
- Do we already have U.S. donors, churches, foundations, or other supporters?
- Is U.S. fundraising part of our long-term strategy?
- Who will serve on the U.S. board?
- How will the U.S. organization make decisions about charitable funds?
- What relationship will exist between the U.S. organization and the foreign nonprofit?
- How will grants and international transfers be documented and monitored?
- Will the organization eventually hire employees or establish operations in the United States?
- Are we prepared for the ongoing corporate, tax, governance, and reporting responsibilities of a U.S. nonprofit?
These questions can help determine whether creating a U.S. nonprofit makes sense or whether another structure may better accomplish the organization's goals.
Think Beyond the 501(c)(3) Application
For international organizations, establishing a presence in the United States is not simply about filing an application with the IRS.
The structure created at the beginning can affect fundraising, governance, control of funds, relationships with donors, international grantmaking, and long-term compliance.
An organization that expects to raise substantial support in the United States may need a very different structure from one receiving occasional support from a handful of American donors.
Likewise, an organization that wants only a fundraising presence may have different needs from one planning to hire U.S. staff, open an office, enter contracts, or conduct programs within the United States.
Building a U.S. Fundraising Strategy That Can Grow With You
Interest from U.S. donors can create significant opportunities for an international nonprofit, ministry, or charitable organization.
But the goal should not simply be finding a way to accept American donations.
The goal is to establish a structure that allows the organization to build relationships with U.S. supporters while meeting the legal and governance requirements that come with operating a U.S. charitable organization.
For some organizations, that may mean establishing an independent Friends Of Organization. For others, a different structure or relationship may make more sense.
Getting that structure right at the beginning can make it much easier to grow U.S. fundraising without creating unnecessary compliance problems later.
The Nonprofit Team helps international nonprofits, ministries, and charitable organizations evaluate their options for establishing a U.S. presence, developing U.S. fundraising structures, and navigating the legal requirements that come with cross-border charitable work.
If your organization is based outside the United States and is exploring how to raise support from U.S. donors, our attorneys can help you evaluate your options and determine a structure that fits your long-term goals.
The information provided in this article does not, and is not intended to, constitute legal advice or investment advice; instead, all information, content, and materials available in this article are for general informational purposes only. The information contained in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites. Such links are only for the convenience of the reader, user, or browser; the author does not recommend or endorse the contents of the third-party sites.
Readers of this article should contact their attorney to obtain advice with respect to any particular legal matter.
Anthony & Sparkman, PLLC is a law firm with attorneys located in both Dallas/Fort Worth and Kalispell, Montana, that provides legal counsel to both churches and nonprofits around the world. John Anthony & Michele Sparkman have spent over a decade providing general counsel to churches and nonprofits on issues ranging from incorporation, governance, employment, policies and procedures, taxes, succession planning, real estate development, and much more. For more information, visit our website at www.thenonprofitteam.com.
