U.S. borders need not constrain the activities of U.S. public charities. A § 501(c)(3) public charity may conduct tax-exempt activities internationally, including by directly operating programs in foreign countries, making grants to foreign organizations, and providing charitable assistance to individuals living outside the United States. Section 501(c)(3) does not require that a charity conduct its activities solely in the United States or serve only U.S. beneficiaries.
This article explains the basic federal tax requirements and best practices for U.S. public charities (referred to here as “U.S. charities”) engaged in international grantmaking. Private foundations and donor-advised funds are subject to additional rules (discussed below as well).
Applicable Tax Framework and Key Principles
A fundamental requirement of international grantmaking is that a U.S. charity retain and exercise sufficient control over its charitable assets to ensure that they are used in furtherance of its own tax-exempt purposes. This requirement is best understood through three related principles:
1. The charity must not act as a mere conduit for a foreign recipient;
2. The charity must exercise control and discretion over the use of grant funds; and
3. The charity must maintain sufficient records to demonstrate that the funds were used for tax-exempt purposes.
Tax-Exempt Status and Charitable Deductibility Are Different Questions
A U.S. charity may make grants to foreign individuals and to organizations that are not exempt under § 501(c)(3) and have no IRS determination letter. Permissible recipients include foreign organizations, foreign governments (for exclusively tax-exempt purposes), and foreign individuals selected on a charitable basis. Consistent with the principles above, however, the U.S. charity must limit each grant to activities that further its own exempt purposes, retain appropriate control and discretion over the use of the funds, and maintain records showing that the funds were used for tax-exempt purposes.
A foreign organization may itself qualify for recognition of exemption under § 501(c)(3), because tax-exempt status under § 501(c)(3) is not limited to organizations formed in the United States. The charitable deduction rules, however, are narrower. Contributions made directly by U.S. donors to most foreign organizations are not deductible for federal income tax purposes, because § 170 of the Tax Code requires that the recipient organization be created or organized in the United States.
This distinction is central to the first principle above. A U.S. charity may make grants to a foreign organization, including one recognized under § 501(c)(3), but it may not simply receive deductible contributions from U.S. donors and pass them through to a foreign organization. If the U.S. charity has no meaningful authority over the funds, the foreign organization may be treated as the true recipient of the contribution, and donors may lose their charitable deduction.
Exercising Meaningful Authority: No “Mere Conduit”
How does a U.S. charity exercise meaningful authority over its funds, rather than acting as a mere conduit?
A U.S. charity may solicit contributions for a particular foreign project, or even for a project to be carried out by a specifically identified foreign organization. The charity must, however, independently review and approve the project before soliciting funds and must retain the legal authority to modify, suspend, withdraw, or redirect any grant funds. The decisive issue is not whether the donor expresses a preference for a particular project or recipient. It is whether the donor’s direction is legally binding and whether the U.S. charity’s approval is genuine rather than automatic.
Accordingly, a U.S. charity should make clear in its solicitation materials, gift acknowledgments, grant policies, and internal practices that it retains exclusive legal control over all contributed funds. It should also retain authority to refuse a requested grant, discontinue future payments, withdraw approval of a project, and redirect funds to another tax-exempt use when necessary.
Control and Discretion Are Matters of Substance, Not Structure
Federal tax law does not require complete separation between a U.S. charity and a foreign organization. Nor does the Internal Revenue Code categorically prohibit overlapping directors, affiliated governance structures, religious oversight, or close operational relationships between them.
The relevant question is whether the U.S. charity in fact exercises sufficient control and discretion over its charitable assets. The IRS has identified several practices that demonstrate sufficient control and discretion, including:
1. Reviewing and approving requests for funds;
2. Investigating the purposes for which the funds will be used;
3. Limiting grants to specific projects consistent with the organization’s tax-exempt purpose;
4. Requiring written grant agreements;
5. Obtaining periodic reports;
6. Maintaining adequate records;
7. Retaining the authority to refuse a requested grant; and
8. Retaining the right to withdraw approval.
Whether or not a U.S. charity is closely affiliated with a foreign grantee, the charity’s governing body must retain and exercise its legal and fiduciary authority. In practical application, that means documenting the authority in writing, such as in grant agreements, policies, and related correspondence, and actually exercising it through the practices listed above.
“Friends of” Organizations and Other Affiliated Structures
The control and discretion requirements explained above are particularly critical for ““friends of” organizations, which are U.S. charities formed to support the work of a particular foreign organization. Some are named “Friends of [foreign organization]”; others have names that do not reveal the affiliation. Either approach is permissible.
Federal tax law does not prohibit “friends of” or other affiliated U.S.–foreign structures. The U.S. charity must, however, remain the true recipient of the contributed funds. Even where the relationship is close, the U.S. charity’s board should independently review proposed projects, determine whether they further the U.S. charity’s purposes, approve or reject grant requests, require appropriate reports, and retain the right to withdraw or redirect funding.
A U.S. charity thus may work closely with a foreign organization and may even share directors, leadership, or religious oversight. What the law requires is control and discretion in substance, not structural separation.
Best Practices for International Grantmaking
No single grantmaking procedure is appropriate for every situation, but a U.S. charity should take the following steps before granting funds internationally.
1. Confirm tax-exempt purpose. Confirm that the proposed grant advances the charity’s own charitable, religious, or educational purposes. Grant request and approval records should identify the project, the expected beneficiaries, the activities to be conducted, the project budget, and the anticipated tax-exempt outcomes.
2. Conduct a pre-grant inquiry. The scope of the inquiry should reflect the size, duration, purpose, location, and risk associated with the proposed grant. The charity should develop a reasonable understanding of the grantee’s history, leadership, programs, financial condition, internal controls, prior grant experience, and ability to carry out the proposed project. It should also consider any relationships between the grantee and the charity’s directors, officers, employees, donors, or other insiders. The purpose of this inquiry is not to eliminate all possible risk. It is to establish a reasonable basis for concluding that the grantee is capable of using the funds for the intended tax-exempt purposes and protecting the funds from diversion. The charity should document both the inquiry and the basis for its approval.
3. Approve and document the grant. The grant should be approved by the board, an authorized committee, or a properly delegated officer in accordance with the charity’s governing documents and grantmaking policies, and the approval should be recorded in writing, such as in board minutes or a written resolution. The approval should identify the grantee, amount, tax-exempt purpose, grant period, budget, payment schedule, and any material conditions.
4. Enter into a written grant agreement. The agreement should clearly limit the use of funds to the approved purpose and require appropriate financial and narrative reporting. It should also require the grantee to maintain adequate records, notify the charity of material changes, and return unused or improperly used funds, and it should permit the charity to suspend or discontinue payments. For larger or higher-risk grants, the charity may make payments in installments, with later payments conditioned on satisfactory reporting and progress. Experienced legal counsel can help structure these terms.
5. Monitor the grant. Whether through the board, a committee, or a designated officer, the charity’s monitoring may include receiving and reviewing narrative and financial reports, budget-to-actual comparisons, receipts, invoices, bank records, virtual meetings, site visits, third-party evaluations, or audits. The appropriate level of monitoring will depend on the circumstances. A longstanding grantee with a strong compliance history may warrant less extensive oversight than a new organization operating in a conflict zone or other high-risk environment.
If reports are late, incomplete, or inconsistent, the charity must follow up. Evidence of misuse may require suspension of future payments, further investigation, corrective action, a demand for repayment, and legal advice.
Other International Grantmaking Processes
Leaders of U.S. charities sometimes assume that every grant to a foreign organization requires an equivalency determination or expenditure responsibility. These technical procedures instead apply primarily when private foundations (which are also § 501(c)(3) organizations but are typically funded by a single source and subject to additional restrictions) or donor-advised funds (DAFs) make grants to foreign organizations. An equivalency determination is a good-faith determination that a foreign grantee is the equivalent of a U.S. public charity. Expenditure responsibility is a set of pre-grant inquiry, grant agreement, reporting, and recordkeeping requirements for grants to organizations that are not public charities.
Although generally not required for public charities, many of the practices associated with expenditure responsibility—pre-grant diligence, written agreements, periodic reporting, monitoring, and corrective action—provide a useful framework for public charities as well. Nonprofit leaders should seek legal advice when contemplating international grants by private foundations, DAFs, supporting organizations, or other entities subject to special statutory restrictions. Our firm has addressed these topics in related articles on equivalency determinations, expenditure responsibility, DAFs and international grantmaking, and supporting organizations.
Grants to Foreign Individuals
A U.S. charity may also provide charitable assistance directly to foreign individuals. As with grants to individuals in the United States, the charity should use objective eligibility and selection criteria and maintain records sufficient to establish the charitable nature of the assistance. Those records should identify the recipient, the amount and type of assistance, the tax-exempt purpose served, the method of selection, and any relationship between the recipient and the charity’s directors, officers, employees, or other insiders.
Different recordkeeping may be appropriate for immediate disaster relief. When a charity distributes food, water, medicine, blankets, or similar emergency assistance, it may be impractical to record the name and address of every recipient. The charity should still document the eligibility standards, type and quantity of assistance provided, date and location of distribution, estimated number of persons assisted, and tax-exempt purpose accomplished. For more on the applicable IRS requirements, see our related article on disaster relief.
Sanctions and Other Federal Law Requirements
Keep in mind, even if a U.S. charity follows these procedures and a grant furthers a valid tax-exempt purpose, the grant may be prohibited by U.S. sanctions or other federal laws. Economic sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) prohibit charities from granting funds to sanctioned individuals, entities, and regions unless a general or specific license applies. Federal law also prohibits providing material support to designated terrorist organizations and certain other prohibited persons.
U.S. charities should therefore maintain a risk-based compliance process appropriate to the countries, persons, banks, intermediaries, and activities involved. Depending on the circumstances, this process may include screening the grantee, key personnel, banking institutions, and material subrecipients, reviewing ownership and control relationships, restricting subgrants and cash transfers, and conducting enhanced diligence for activities in sanctioned countries, conflict zones, or other high-risk environments.
Sanctions screening should not be limited to only name-checking grantee organizations and key leaders. U.S. charities should also understand how funds will move through the banking system to the grantee(s), whether specific goods or activities are prohibited in higher risk locations, and other risks associated with the particular geographical area and environment where the grantee operates. And in higher risk locations, for further guidance, see our related articles on sanctions compliance.
Form 990 Reporting
For U.S. charities with IRS 990 reporting obligations, international grants and activities also trigger reporting on Form 990, Schedule F. Depending on the amount and nature of its international activities, a charity may need to report foreign programs, offices, employees, agents, investments, grants to organizations, and assistance to individuals. Schedule F also asks about the charity’s procedures for monitoring grants made outside the United States.
The charity’s Schedule F responses, and its answers to any inquiry from the IRS, board members, or donors, should reflect the principles, procedures, and safeguards described above. A charity engaged in international work should therefore maintain its records throughout the year in a manner that supports accurate Form 990 reporting.
Concluding Remarks
International grantmaking provides an incredible opportunity for U.S. charities to accomplish their missions. Federal tax law does not require absolute separation between U.S. charities and foreign organizations, nor does it require the elimination of every possible risk.
The central legal requirement is that the U.S. charity remain responsible for its charitable assets. It must independently determine whether a grant furthers its purposes, conduct appropriate diligence, impose reasonable restrictions, monitor the use of funds, and maintain records demonstrating that the grant was used for tax-exempt purposes.
A well-documented and consistently implemented grantmaking process allows a U.S. charity to support effective work outside the United States. Careful attention to these processes helps protect the grantmaking organization’s tax-exempt status, its donors, and the charitable resources entrusted to it.
