23 March 2018
The Following Article Appeared in the May/June 2009 Issue of ODYSSEY
A Tradition of Giving
The tradition of charitable giving by Greeks, both at home and among those living in the Diaspora, has been well documented. For Greeks residing in the US, the charitable income tax deduction has always offered an additional incentive to make charitable gifts. Unfortunately, Americans do not generally receive an income tax deduction for gifts to foreign charities. If structured properly, however, Greek Americans can receive a tax deduction for gifts that ultimately benefit Greek charities and the Greek people. Additionally, following a recent case from the European Court of Justice, Greeks residing in the European Union may also receive a tax deduction for making gifts to Greek charities.
The city-state of Athens in the fifth century BC was the first to promote philanthropy among its wealthiest citizens following the philosophical school of Stoicism, as was observed by Elizabeth Phocas in her article The Art of Giving (Odyssey Magazine, January/February 2008). During last three decades of the eighteenth and the first two decades of the nineteenth centuries, following 400 years of Ottoman rule, private philanthropy facilitated the development of an independent Greek state. Merchants living throughout the Mediterranean, the Balkans and central Europe endowed schools and libraries, published books, and encouraged higher education for young Greeks, as observed by the noted historian, Richard Clogg in A Concise History of Greece (1992). Greeks living outside of Greece continued this tradition through the nineteenth and early twentieth centuries. The gifts from frugal, hard-working and enterprising Greek migrants back to their families in Greece constituted a key element in the Greek balance of payments.
There can be no doubt that Greece, has benefited considerably from the philanthropy of the Greek Diaspora, which numbers in the millions. Of this Diaspora, it is reasonable to conclude that Greek Americans are particularly generous in their charitable giving because, in prior years, charitable giving by Americans appears to be more than double that of the their English counterparts (as a percentage of gross domestic product). This may be accounted for in part by the generous tax deductions available in the US for charitable gifts, although the UK has introduced a number of tax reforms in recent years, such as income tax relief on gifts of land and quoted shares.
As was recently observed by George D. Tselos and Vicki J. Yiannias in Giving Back (Odyssey Magazine May/June 2008) many high-profile foundations associated with names such as Costopoulos, the Greek Orthodox Archdiocese, Archbishop Spyridion, Behrakis, Jaharis, Catsimatidis, Calamos, and Tsakopoulos have provided meaningful gifts to support American and Greek-American causes benefiting life in education, art, and medicine.
Hurdles to Cross-Border Philanthropy in the US
It is not unusual to find that Greeks living outside of Greece harbor a strong attachment to Greek culture and society. Supporting Greece through charitable giving is a meaningful way through which one can connect with the place and people of Greece – while furthering the culture that enriches the lives of many. Most countries, however, limit incentives to charitable giving to gifts that benefit the host country. The US has no restriction on where charitable funds can be used, but individuals in the U.S. cannot claim a tax deduction for contributions to foreign charities. Similarly, contributions to organizations formed in the United States that simply transmit such funds to a foreign charitable organization are not deductible to the taxpayer. In the US, this is commonly referred to as the “anti-conduit rule.” Under this rule, a charitable income tax deduction may be denied for contributions made to any US charity if they are earmarked for a particular non-US donee.
In essence, the test for determining the deductibility of charitable contributions is whether the US charitable organization has full dominion and control over the donated funds and the discretion as to their use, so as to insure that such funds will be utilized to carry out the US organization's functions and charitable purposes. So long as it is determined that a US charity has dominion and control, a US citizen or resident can receive a tax deduction for a charitable contribution, even if the funds are ultimately expended abroad.
Overcoming Hurdles: Planning Options
There are a number of ways that Greeks living in the US can make charitable donations that benefit Greek charities, while still qualifying for the charitable income tax deduction.
The most flexible way for a donor to make gifts is through a private foundation. A private foundation gives the donor maximum control and allows the donor to tailor the charitable activities to be exactly as desired. However, a private foundation also brings with it the highest administrative burden, including an obligation for expenditure responsibility on grants made to non-US charities. Expenditure responsibility consists of three elements (i) a pre-grant inquiry, (ii) a grant agreement, and (iii) reporting mandated by the grant agreement. As a result, while the law requires expenditure responsibility, in many ways it represents a best practice and one that is often embraced by donors who wish to ensure their charitable donations are used wisely.
In addition to flexibility, establishing and funding a US private foundation enables the assets to grow tax free until distributed as grants. Once contributed to a private foundation, any assets, such as stock, securities, real estate or fine art, can grow free from income tax or capital gains tax. Investments through the foundation are subject only to an excise tax of 1% to 2%. Therefore, in addition to the income tax deduction for the donor described above, the assets may grow faster in a foundation, and ultimately a donor can thereby give more money to charitable causes. However, private foundations are not for everyone and other options exist.
Many Americans choose to contribute to a US public charity that itself operates in Greece. Such donations qualify for a US income tax deduction since use of the funds is under the complete control of the US charity. The American Hellenic Educational Progressive Association (AHEPA), Plant Your Roots in Greece Foundation, and The International Orthodox Christian Charities (IOCC) are each excellent examples of US Public charities with a strong tradition of giving to Greek causes and projects in Greece.
Prospective donors can also contribute to a Greek charity through a “friends of” organization. These are typically public charities, but they carry on their charitable mission by supporting the activities of one or a small group of foreign charities. As above, this would entitle the US donor to a full US income tax deduction. These types of charities are sometimes referred to as “supporters of” or “feeder” organizations, although they are operated carefully to ensure compliance with the anti-conduit rule. Such “friends of” organizations may have already been formed by another group, or they may be newly formed. Either way, they do tend to limit a donor's direct contact with the charitable mission compared to a private foundation. At the same time they tend to have very narrow missions, so the donor can be confident how funds will be expended. A good example of a “friends of” organization is the Federation of Hellenic Societies of Greater New York, Inc.
Another option is a community foundation or their commercial brethren, the donor-advised fund. Such organizations account for the donor's donation and its' presumed investment return in a segregated account, and the donor then suggests, or “advises”, on what charitable purposes it should be used for. A donor should be careful to determine if a particular organization is willing to make grants to foreign charities if that is the preference of the donor. Some donor-advised funds will, others will not and you should determine this ahead of time. In addition to understanding this formal policy, a potential donor should seek some assurance that the organization would be willing to make a donation to any specific foreign organizations the donor intends to benefit. Donor advised funds are not required to follow the suggestions of their donors, although they do in almost all instances unless the requested grant would violate a legal restriction or a formal policy.
While relatively straightforward, public charities, “friends of” organizations, and community foundations are considerably more limiting than private foundations because in each case the donor places his or her charitable goals into the hands of others. Private foundations, on the other hand are less straightforward and require the advice of counsel in formation an management, but offer greater flexibility. In addition, private foundations provide direct control over the investment of the foundation assets, which may ultimately generate materially more wealth for the donor to put towards his charitable endeavors. The investment options offered by most other vehicles tend to be limited. In the end, however, Greeks residing outside of Greece should know that they have many options and should not hesitate to talk with their advisors about them.
European Union Residents
In an important development, the European Court of Justice has ruled against certain territorial limitations to cross border philanthropy. As a result of these rulings, residents of the European Union should be able to receive a charitable deduction for gifts to a charity formed in any European Union country as though it was formed in their country of residence. The legislative response to this decision, however, is not yet clear.
Like the United States, many European countries restrict charitable deductions by their residents to gifts made to a charity organized within their country. In a recent case, Hein Persche v. Finanzamt Ludenscheid (largely following the logic of a slightly older case: Centro di Musicologia Walter Stauffer v. Finanzamt Munchen fur Korperschaften), the ECJ held that permitting Member States to disadvantage charities solely because they are established in another Member State would constitute an obstacle to the free movement of capital and therefore is counter to the goals of the European Union. Where an organization is formed in one Member State, it must be treated as a charity by a second Member State so long as it satisfies all of the requirements for charity status in that Member State other than the state of formation requirement. The second Member State cannot deny the organization charitable status solely because it is not established in its territory.
Under the authority of Hein Persche, Greeks residing in the European Union, but outside of Greece, should be free to donate to many Greek charities and still receive the same charitable deduction from their home country as it they had made a purely domestic donation. This should greatly facilitate cross border philanthropy for EU citizens and residents, but the law in this area remains in a state of flux and it is too early to know exactly how any particular EU Member State will respond to these rulings.
Dual Citizens and/or Residents
Certain individuals and/or families with inherently international concerns might be characterized as dual citizens or residents of two countries. This is particularly common for Americans who are subject to US income tax because of their citizenship, regardless of their residence. In these cases, a charitable deduction under one of the two relevant tax regimes usually does not actually reduce the overall income tax paid by the person. They need a charitable deduction under both tax systems or the deduction is effectively wasted. It is often possible to create a charitable giving structure that allows for tax deductions in both the countries of citizenship and residency. Such planning includes qualifying a charity (including, but not necessarily limited to a private foundation) in each of the subject countries. This “dual qualified structure” can be highly effective in the right circumstances. Advisors familiar with cross border philanthropy can offer important insight on establishing and operating such structures.
While the long tradition of the Greek Diaspora giving to Greek charities continues, maximizing the tax benefits of such gifts requires a great deal of care. At the same time, there are more opportunities for effective cross-border philanthropy then ever before, and tremendous tax benefits can be achieved for generous members of the Greek Diaspora.