Tax efficient giving
Obtaining tax relief is never the motivation for giving. However most donors do want to give tax efficiently so that they can maximise the amount available to give. It's also often overlooked that some cross-border gifts can even create a tax liability, despite the charitable nature of the gift.
Depending on location, charitable donations are generally either tax-exempt or taxed at a lower rate than other gifts or legacies. Preferential tax rates are also likely to apply to the income and gains of charitable foundations themselves.
In nearly all jurisdictions, favourable tax treatments are only available to structures (or donations to structures) established locally. Until recently, for example, the UK only granted tax reliefs to charities that were also established there. While the same situation applied in most other European countries, recent judgments in the European Court of Justice have seen some relaxation, though Europe is a long way off from a borderless region for charitable giving. The US and Hong Kong similarly limit their tax reliefs to donations given to ‘domestic’ charities, with some limited exceptions.
‘Territoriality’ – or the fact that a gift to a charity overseas can create a change to your tax situation – can be a motivation in setting up a charitable foundation in the jurisdiction where the main donors are taxable. Foundations can be funded tax-efficiently, and may be able to make grants to foreign entities, whereas a donor’s direct charitable donations to such entities would not be eligible for tax benefits.
Where individuals are taxable in more than one jurisdiction, even more onerous conditions apply. US citizens earning income outside the US are particularly exposed. Their income will usually be taxable in the US, with credit given for tax paid elsewhere. But if they give to a US foundation, they are unlikely to get tax relief in the other jurisdiction (even though they must still pay tax there).
The solution is for the US and/or UK or Hong Kong taxpayer to ensure that the foundation is ‘dual-qualified’ for tax purposes in both jurisdictions. Although this is just one hypothetical situation, it clearly illustrates why it is so important to consider who will be funding a foundation before setting one up.
Donors with assets in more than one jurisdiction, and international families with potential donors in more than one jurisdiction, may be able to take advantage of the limited exceptions to ‘territoriality’, or an international group structure may be needed to ensure all interested family members can efficiently fund the family philanthropy.
For further help or informationGet in touch
Recognized for non-profit/charities law, tax law and trusts and estates law in San Diego by Best Lawyers 2016 and 2017
Ranked Band 2 in Chambers 2017 for Charities
Ranked Tier 2 in Legal 500 2016 for charities and not-for-profit
Ranked in Band 1 for private client for the last 16 years