US fundraising for foreign charities

16 August 2022 | Applicable law: US

The US has a long tradition of charitable giving and the US tax law has been crafted over many years to encourage such generosity. A longstanding principle of US law is that funds raised in the US can be used outside the US.  As a result, many non-US charities are now interested in raising funds in the US to support programs conducted abroad. This paper outlines the legal requirements that must be satisfied to establish and operate a US charitable affiliate organization to raise contributions by US residents.  

Income tax deductions and the anti-conduct rule

Although funds raised by a US charitable organization can be used outside the US, contributions made directly to a foreign charitable organization are not deductible for US income tax purposes. Contributions to US resident organizations that have qualified with the Internal Revenue Service (“IRS”) are eligible for the income tax deduction. For that reason, many non-US charitable organizations create US affiliate organizations (so-called “Friends Organizations”) to encourage contributions by US persons.

The IRS has expressly allowed the deductibility of contributions to Friends Organizations that receive contributions in the United States, provided that the Friends Organizations do not act as “mere conduits” of funds to the foreign charities. Generally, this means that the board of directors of any Friends Organization must exercise independent control and discretion over grants made to the non-US affiliate. The directors of the US organization must have full control over donated funds, and discretion as to their use, to insure that funds will be used to carry out the US organization’s functions and purposes. This is often referred to as the “dominion and control” rule. The bylaws of a Friends Organization will vest the directors with the requisite control and discretion with regard to donated funds. Typically, directors of a Friends Organization have the power to make grants to any organization operated for charitable, religious, scientific, educational, etc. purposes, not just its foreign affiliate. Directors must have the power to review, approve and deny all requests for funds, and require that such requests specify the use to which the funds will be put. As a matter of best practices, the board of directors should require grantees to furnish periodic accountings and retain the right to withdraw at any time approval of a grant to another organization. As a result, it is important that Friends Organizations refuse to accept contributions that earmarked by donors for a specific non-US organization, or non-US purpose, unless the board has previously approved the donor’s goals.

Public charities and private foundations

US tax law divides charities into two broad categories: public charities and private foundations. Although some Friends Organizations are private foundations, the vast majority are public charities. This is because the tax benefits for contributions by individuals are significantly better for contributions made to a public charity. For example, cash contributions to a public charity will generally be deductible by individuals to the extent of 50% of adjusted gross income instead of 30%, and many property contributions can be valued at their full fair market value rather than cost basis. Furthermore, US private foundations cannot make grants to other private foundations without exercising “expenditure responsibility.” That requires burdensome paperwork relating to the tracing of the use of funds. Therefore, as a practical matter, US foundations will not make grants to a Friends Organization unless it is a public charity. A Friends Organization can qualify as a public charity in a number of ways. However, unless the Friends Organization has significant direct activities of its own, (for example the Friends Organization is a church, school, hospital or medical research organization) it will be required to qualify as a “publicly supported charity” or a “supporting organization” as such terms are defined in the Internal Revenue Code.

Publicly supported friends organizations

It is fair to say that the vast majority of Friends Organizations fit into this category. In order to be considered publicly supported an organization must generally receive at least one-third of its gross annual financial support from a combination of public and government sources. An organization that cannot satisfy the one-third public support requirement may nonetheless qualify as a publicly supported charity if it meets a subjective, facts and circumstances test. Under that alternative test the organization must demonstrate that (i) the total amount of governmental and public support normally received by the organization is at least 10% of its total support, and (ii) the organization has a continuous and bona fide program for solicitation of funds from the general public, governmental units, or public charities. In determining whether the organization meets the alternative 10% test, all other pertinent facts and circumstances are taken into account, including the public nature of the organization’s governing board.

“Supporting” friends organizations

The IRS has ruled that a “supporting organization” can qualify as a Friends Organization. The advantage of using a supporting organization is that the organization would not have to demonstrate public support in order to qualify as a public charity. Rather, the Friends Organization would have to be “supervised by or controlled by” a foreign affiliate which, if formed in the US, would qualify as a public charity. For example, if the foreign supported organization is a school or a church or is publicly supported within the rules described above, a US Friends Organization supervised by or controlled by such foreign organization would qualify as a supporting organization. Generally this requirement is satisfied if the foreign organization directly or indirectly selects the directors of the Friends Organization. The IRS has held that contributions to such a domestic organization solicited for the specific projects of a foreign organization would be deductible because the domestic organization had reviewed and approved projects as being in furtherance of its own exempt purposes and maintained control and discretion as to the use of the contributions. In effect the IRS held that the board of directors was independent notwithstanding that fact that the foreign organization selected the members of the board of the US Friends organization. Thus, the contributions received by the domestic charity from project-specific solicitations were regarded as for the use of the domestic charity and not for the organization receiving the grant from the domestic.

Legal form and governance

Any US charity, including a Friends Organization, must be formed with reference to both US state and federal laws. Charitable organizations normally take the form of a corporation or a charitable trust. A corporate form of charity is generally preferred as the duties of directors and officers are better defined. In addition, the corporate form offers greater liability protection for those managing the organization. Delaware is the preferred jurisdiction for incorporation due to its flexible corporate and not-for-profit laws.

A corporate charitable organization is governed by a certificate of incorporation and by-laws. Under US Federal law, the governing instruments must specify the organization’s charitable purposes. The charitable purposes of the charity must be consistent with those stated broadly in Section 501©(3) of the Internal Revenue Code as “religious, charitable, scientific, testing for public safety, literary or educational or fostering national or international amateur sports competition . . . or the prevention of cruelty to children or animals.”

In order to negate a possible argument by the IRS that a Friends Organization is a conduit, it is recommended that it have a majority of directors who are not also directors of, or employed by, the foreign charity. There is no requirement that the directors or officers of a Friends Organization be US persons.

State law and best practices dictate that the Friends Organization adopt additional policies on investment and a range of other issues.

Application for federal and local tax exemptions

To qualify with the IRS, a charity must apply for a determination letter from IRS on Form 1023. The filing fee is currently $600. The IRS application must be filed within 27 months of the creation of the charitable organization. The IRS issues its approval of the Friends Organization’s exempt status in the form of a determination letter. Once the determination letter is issued, it will relate back to the date of formation of the organization. The IRS generally issues a determination letter within six to nine months of filing. If an organization has established exemption from US federal income tax, it will also qualify for exemption from a variety of state and local taxes. In New York, for example, nonstock corporations organized and operated exclusively for nonprofit purposes are exempt from state and local income tax; charitable, religious, educational and other specified organizations are exempt from property taxes; and organizations described in Section 501©(3) of the Code are exempt from state and local sales and use taxes. Like all taxes, these state and local provisions have many nuances.

Periodic filings

Friends Organizations (like other US qualified charities) must file an annual return with IRS on Form 990. Generally the 990 will show the annual revenues and expenses as well as a balance sheet for the organization. The organization will be subject to US taxes only if it engages directly in a for-profit business or if it has debt-financed investment income.

Most US states, including New York, require an annual filing by any charitable organizations operating in that state even if organized elsewhere (e.g., Delaware). Typically this is a copy of the federal form with an additional short state filing. The organization must also register in advance of conducting any fundraising in most states where it intends to raise funds. In that connection, the organization must report annually on its activities to the attorney general. Most states, including New York, require that the organization present audited financial statements if total receipts are in excess of a certain threshold. In New York, if an organization solicits funds and has a least $250,000 in gross receipts, it must have an independent review of its financial statements by a CPA. If the gross receipts threshold exceeds $750,000, starting in 2017 ($1 million, starting in 2021), a CPA audit is required.


As outlined above, the formation of a US fundraising entity is manageable if pursued in accordance with the particular rules governing them. The operation of Friends Organizations also requires vigilant compliance with the special rules governing their operation, which are, in addition to those governing other US charities. With proper policies set in place, the risks of violating the custody and control test, and subsequent disallowance of tax benefits, can be avoided.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.


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