Preface

It was not very many years ago that international philanthropy was the province of large organizations like the Red Cross, UNICEF, and Save the Children. Americans who wanted to help people overseas gave to those organizations and others like them. For donors who wanted a more personal connection, some organizations offered individual child sponsorship, which allowed donors to see the direct impact of their giving.

In recent years, while large global organizations have continued to attract funding, there has been a new groundswell of small and medium-sized organizations, formed by growing numbers of individuals who want to do more than write a check or even sponsor a child. This phenomenon was described by Nicholas Kristof in a New York Times Magazine article in which he coined the term “Do-It-Yourself Foreign Aid,” to identify a revolution that “starts with the proposition that it's not only presidents and United Nations officials who chip away at global challenges.”

Kristof noted that the young idealists he was describing are sometimes naive about what it takes to solve social problems, and don't always appreciate the need to work collaboratively with the local populations they intend to serve. This book focuses on another set of issues not readily apparent to the passionate leaders of the Do-It-Yourself Foreign-Aid Revolution: the myriad and diverse legal considerations that must be taken into account in planning and operating any nonprofit organization with cross-border activity.

A new army of international philanthropists is boldly forging ahead, creating nonprofit organizations, raising funds in the United States and sometimes abroad, traveling overseas, building relationships with foreign individuals, organizations, and governments, and even hiring local employees. The new international nonprofits they create often have all, and sometimes more, of the passion and commitment found in their larger counterparts. What they often lack are the resources to engage staff and consultants to ensure that they comply with U.S. and foreign laws while keeping their eyes on the mission.

While it is widely recognized that the Internet and social media have eliminated jurisdictional boundaries in so many ways, legal boundaries are alive and well. Individual countries enact and enforce their own laws and work hard to protect their tax revenues. In fact, as we will see throughout this book, legal and tax barriers imposed by individual countries impede the cross-border activities of nonprofits to a far greater degree than they affect international trade.

The operations of nonprofit organizations, in the United States and abroad, are shaped by a variety of laws: notably, those addressing legal structure and governance (such as formation of nonprofit corporations); taxation (including income, estate, sales, excise, property, import duties, and more); anti-terrorism; exports; currency; corruption; immigration; and labor. In some countries, restrictions on the freedom of association preclude or hamper nonprofit organizations. When an organization operates across borders, whether by making grants or directly operating programs, the interaction among legal requirements of two or more countries quickly becomes highly complex.

This book is intended primarily for nonprofit organizations that qualify for U.S. federal tax-exempt status, as so-called 501(c)(3) organizations, and operate and/or fund non-U.S. programs. While there are many categories of U.S. tax-exempt organizations, the 501(c)(3) is the only one (with narrow exceptions) that can attract tax-deductible funds in the United States. While this type of organization may directly operate or fund foreign programs, those foreign programs must also serve 501(c)(3) purposes. A broad range of organizations falls into the 501(c)(3) category, including, among others, those that are engaged in traditional charitable activities such as humanitarian aid, disaster relief, development, global health, the environment, and scientific research.

We will see in this book that any particular foreign country may or may not afford tax-exempt status to an activity that would qualify for it in the United States. Moreover, if in addition to operating foreign programs, an organization is raising funds in one or more foreign countries, it will need to deal with yet another set of rules and restrictions on the use of those funds.

At times, this book uses the word charitable to refer to the range of activities that may be performed in any particular country by an organization that qualifies for tax-exempt status. In some countries, notably throughout most of Europe, the term public benefit is used instead.

An organization that raises funds in the United States and conducts activities in a foreign country must not only comply with the laws of two countries, but must also consider the interaction of those laws and their effect on operational decisions.

If your organization contemplates venturing beyond U.S. borders, you need to address a number of questions:

Will the foreign project be managed and operated by U.S. staff and volunteers, or will you hire locally? If you send U.S. citizens overseas, will your organization be able to compensate them for additional taxes and housing costs? Will U.S. people even be able to obtain visas? If you hire locally, will you need to form a separate nonprofit corporation (or the local country equivalent)? How will you manage cash flows and investments between countries in two or more currencies?

In addition, oversight of foreign operations and funds is essential, but it means there will be people traveling to places that are often difficult and expensive to get to. Here are some fundamental questions to be addressed:

As nonprofit organizations expand internationally, they frequently underestimate the resources required to manage a multinational structure. A passionate founder can quickly find that he or she, together with board members who joined to support the mission, are spending most of their time on administrative matters. Failure to devote the necessary resources to legal, tax, treasury, and other so-called overhead functions will cause an organization to fail, yet funders are often unwilling to support these functions adequately.

All too often, in my legal practice, I have encountered passionate individuals who have barreled down the road, starting up operations, only to run into legal or practical problems that could have been avoided with awareness of some fundamentals. While this book cannot substitute for individualized legal advice, it arms the would-be global nonprofit with knowledge of critical considerations.

Knowledge of the basic legal and practical issues that face international nonprofits will help you make important decisions to give your organization the best chance of success in pursuit of its mission. You will also gain an understanding of the resources required to pursue your mission. By knowing how and where you can run into trouble, you will know when to seek help.

Over Thanksgiving dinner, a friend asked me to describe this book. When I finished, he commented that it sounded like I was trying to discourage people from starting international nonprofits. My purpose is not to deter people from pursuing their passion, but rather to help them find the most effective way to achieve their goals. In truth, many nonprofit organizations fail, particularly in the international arena, because their founders were not prepared to raise the funds and devote the resources necessary to grapple with the puzzling array of legal and practical hurdles described in this book.

In many cases, available resources could have been used more effectively by working with, or through, an existing organization, rather than starting a new one. We will see, in the case study of Families with Children from China, that it may be possible to have your cake and eat it too. If you can find the right foreign partner, you may be able to participate in the development and implementation of projects without having to operate them directly.

At the same time, people start international nonprofits for many valid reasons. Throughout this book you will encounter inspiring stories of successful organizations. Case studies of Ashesi University and Half the Sky Foundation show that sometimes a founder may succeed with an audacious project where there is simply no one else willing to take it on. The case study of Lumana provides an example of a young person who was determined to create opportunities for other young people to gain hands-on experience that wasn't available to them through established organizations.

Whatever motivates you to consider starting a global nonprofit, my goal is to help you make informed decisions about what it will take, and how best to pursue your mission. There are so many global issues waiting to be addressed, and so many people with passion. My sincere hope is that adding a touch of realism will help those passionate people succeed in making a difference in the world.

How to Use This Book

While all readers are invited to read this book cover-to-cover, many will hone in on certain chapters. I have included case studies throughout the book to illustrate the variety of ways U.S.-based organizations, from the largest to the smallest, have approached entering the international arena, and how they have dealt with a variety of legal and practical concerns.

If you are new to the realm of international nonprofits, you may find it useful to begin with Chapter 1, which provides an overview of the ways an organization can engage in international activities. On the other hand, if you have an established organization with international activities, you may find Chapters 8 and 9 useful as checklists of U.S. and foreign issues you need to consider.

This book addresses legal and practical considerations for organizations that are exclusively grantmakers, as well as those that directly engage in foreign activities. Chapters 2 and 3 provide an overview of U.S. legal requirements for organizations that make cross-border grants, and Appendix B lists a number of resources for those organizations. Many organizations that directly operate foreign programs also engage in some form of grantmaking, and therefore need to be concerned with the rules for international grantmaking. However, for most organizations either Chapter 2 or 3, but not both, will be relevant, as they address two distinct types of 501(c)(3) organizations, so-called public charities and private foundations.

The remainder of this book (Chapters 4 through 10) is devoted to those organizations that choose to go an extra step, or more, by operating directly in one or more countries outside the United States. Chapter 4 explores some alternatives to acting alone when creating a foreign program, and then looks at alternative ways of structuring foreign operations. Chapter 5 takes that a step further, exploring the creation of a separate foreign organization, or so-called legal entity, and the considerations involved in structuring the relationships among separate operations in multiple countries.

Chapter 6 looks at legal, tax, and practical considerations related to staffing foreign operations with any combination of U.S. and foreign employees and volunteers.

Chapter 7 takes it all a step further, looking at raising funds in foreign countries.

Chapters 8 and 9 provide a checklist of U.S. and foreign (respectively) legal and practical concerns. If you have already read the earlier chapters, or already have an established foreign presence, this will take you a step further. Chapter 9 provides an overview of significant foreign laws and practical issues you are likely to encounter and gives specific country examples.

Finally, Chapter 10 puts it all together with a story. This is the story of one organization that went from start-up to global nonprofit in a short 13 years. That is not for everyone. But if you have a compelling mission and extraordinary passion, and you're prepared to devote the resources to getting it right, you too may create a global nonprofit.

No part of this book requires that the reader have a legal background. Rather, this book provides a basic overview of the legal landscape for international nonprofit activities so that nonprofit founders, directors, and managers can make informed decisions about how best to structure operations and plan for the use of scarce resources. For those who are interested in more depth (such as lawyers and others with some knowledge of nonprofit law), I have included references and citations to facilitate further research.

In some places, I felt it was important to go into greater depth to help set the stage for fundamental decisions about structuring operations. For example, Chapter 6 discusses the implications of U.S. income tax treaties at some length. While this is intended as helpful background, if you find it to be too much information, you can simply skip those sections. You may, however, want to make a note of the issue so you can discuss it with your lawyer.

Disclaimer

This book is not a substitute for obtaining individualized legal advice. It does not provide legal, tax, accounting, or other professional advice. No attorney-client relationship is established. Rather, the purpose of this book is to help an organization, its founders, directors, officers, and advisors, in making decisions about how to structure international activities.

The publisher and author make no representations regarding the accuracy or completeness of the contents of this book, and specifically disclaim all warranties of fitness for a particular purpose.

The proper interpretation and application of U.S. and foreign laws are highly dependent on specific facts. Laws also change constantly. An organization will need to seek individualized legal advice in the United States and each foreign country in which it operates.

Descriptions of U.S. laws in this book are intended to provide general information that can be used to help guide an organization in making decisions about its operational model, and in understanding the resources required to launch and operate an international nonprofit.

References to foreign laws are provided for purposes of illustrating, in general, the kinds of foreign constraints an organization may face, and how U.S. and foreign requirements interact. Descriptions of foreign laws in this book should not be relied on in forming or operating a nonprofit organization.

This book does not provide a comprehensive overview of U.S. and foreign laws that may apply to the activities of a particular organization. Although I have endeavored to provide an overview of the fundamental U.S. and foreign legal considerations to be taken into account by any international nonprofit organization, additional U.S. and/or foreign laws may be critical to any particular organization.

Websites referenced in this book may have disappeared, or their contents may have changed, between the time the book was written and the time it is read.

This book does not address the ethics of foreign aid, or issues around determining what is and is not appropriate in a particular foreign context.

Internal Revenue Service Circular 230 Disclosure

This book is intended for general informational purpose and is not intended to provide tax advice. As provided in Treasury regulations, nothing in this book is intended or written to be used, and cannot be used for the purpose of (1) avoiding penalties under the Internal Revenue Code, or (2) promoting marketing or recommending to another party any plan or arrangement addressed herein.

Notes

1. Nicholas D. Kristof, “The D.I.Y. Foreign-Aid Revolution,” New York Times Magazine, October 24, 2010, 49, available at www.nytimes.com/2010/10/24/magazine/24volunteerism-t.html.

2. A so-called 501(c)(3) organization is one that qualifies for U.S. federal tax-exempt status under section 501(c)(3) of the Internal Revenue Code (I.R.C.), 26 U.S.C. § 501(c)(3). To qualify for 501(c)(3) status, an organization must be formed for one of the following purposes: religious, charitable, scientific, testing for public safety, literary, educational, or fostering amateur national or international sports competition, or the prevention of cruelty to children or animals. Additional requirements apply. For a description of the requirements and process for obtaining federal tax-exempt status under section 501(c)(3), see IRS Publication 557, Tax-Exempt Status for Your Organization (December 2, 2011), available at www.irs.gov/app/picklist/list/publicationsNoticesPdf.html.