What Every Nonprofit Should Know Before Crossing U.S. Borders
posted Oct 27, 2017 by Sandy Ross, CPA, CFE in the Mission Matters Blog
Considering starting up overseas operations at your nonprofit? There are complicated legal and tax issues that should be considered before setting up shop. In order for your nonprofit to prosper in its global activities, you need to decide how you’d like to structure operations abroad and what policies must be in place for your organization to be on a sound legal and tax footing.
Considerations for organizations operating outside of the US
- Tax Exempt status could be jeopardized. The IRS has always stipulated that an organization can qualify for tax-exempt status based on charitable activities carried out partly or entirely overseas. However, a U.S. based organization is not allowed to act as a “conduit” to send funds overseas without jeopardizing its tax exempt status.
- Organizations have several options for structuring overseas operations. Each option has different legal ramifications. Your nonprofit may decide to only have certain employees carry on overseas activities, while your organization continues all management functions in the U.S. You can also hire a separate legal entity overseas (who will act as an independent contractor) to conduct the overseas activities for your nonprofit. With this option, you can still maintain ownership of any product eventually produced by the overseas entity. Others will set up subsidiaries in foreign countries and control them from the domestic headquarters (the parent company).
- You have to be familiar with local laws. It is very common for a country, state/province, and/or city/municipality to require a foreign nonprofit to register with a governmental agency and be subject to its regulations. If you operate without proper registration, you can be fined and be subject to further penalties. Also, an organization may have to adhere to both U.S. and international tax law, which could get muddy.
- Intellectual property laws and trademark rights differ in foreign countries, sometimes significantly. Often an organization’s most valuable assets are its name and trademark, mailing list and publications. Before launching major activities abroad, take time to work with legal counsel to develop an IP protection strategy, conduct due diligence of potential foreign partners, and secure and register patents, trademarks, and copyrights in the foreign markets that you’re entering.
- There are unique employment issues. If your organization employs anyone working outside their home country, there are a variety of complex tax issues. One example is income tax. You must determine whether or not your employee will be subject to income tax in the host country you’re having him/her operate in. The good news is that the U.S. has entered into income tax treaties with close to 75 countries that may offer exemptions or reduced rates to many U.S. individuals working abroad. However, some bad news.....not all treaties function in the same exact way. So, your first step is identifying whether the nation the employee is operating in has established a tax treaty with the U.S., and, if so, next step? Read up on its specific terms. The employee, for example, might be constrained to spending only a certain length of time in the foreign country under the tax treaty. There are also insurance considerations that you should consider when travelling and working abroad.
For nonprofits preparing to give employees assignments abroad on an ongoing basis, our advice is that you develop educational resources on an employee’s international income tax obligations to help ensure the smoothest possible process.
Your organization will not be able to sustain itself abroad if you do not take the time to adhere to the barriers and legal differences you might face working in a foreign country. Factoring in the U.S. export controls or tax laws could influence your decision on where to operate.