Increasingly, US nonprofits seek to go global by expanding their operations and influence overseas. When a US nonprofit expands its activities across borders, whether by making grants or running programs, the compliance obligations of multiple countries can quickly become overwhelming.
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The feasibility of expanding a nonprofit’s operations into another country also depends on the laws of the target country. Some countries’ laws governing foreign nonprofits are relatively flexible and easy to navigate while others, especially in the developing world, are highly bureaucratic and restrictive.
In the US, our constitution affords US nonprofits sweeping rights to free expression and to associate with whomever we choose – rights that do not exist in many countries around the world. US nonprofits often take these rights for granted and are surprised when they discover foreign laws that restrict their activities in ways they could not imagine at home.
Accordingly, one of the first items of business when considering global expansion is to identify lawyers in the target country who are familiar with the laws that govern the activities of foreign nonprofits. Once a team has been assembled, nonprofits dipping their toes into foreign activity have a range of options from relatively low compliance burdens to very high compliance burdens depending on the model they choose.
One of the least burdensome ways to make an impact in a foreign country is to make grants to foreign grantees already doing the work your organization wants to support. In the US 501(c)(3) organizations are required to operate for exclusively tax-exempt purposes or they risk their exemption. Further, if the funds have been earmarked by donors for the foreign organization, the US charity could risk its exemption and the donors could lose their charitable tax deduction.
To protect the tax status of the US grant-maker, the US grant-maker should establish policies and procedures to ensure that its cross-border grants are used for their intended purpose and are made under its discretion and control. Some of these requirements are driven by US tax law. Others are driven by the US Government’s concern that foreign grants could be diverted to fund terrorism.
Developing written policies and procedures including grant agreements designed to ensure funds are used for their intended charitable purpose will help to ensure compliance with the law.
Note that US charities classified as private foundations must navigate an additional layer of tax rules. Those rules are too complex to be covered in this post, but generally require the foundation to exercise expenditure responsibility, obtain an equivalency determination, or make the grant through a US intermediary.
Collaborating with Another NPO
One way for nonprofits going global to avoid some of the start-up expenses and quickly operate in a new country is to collaborate with another nonprofit that is already working in the country, has a similar mission and goals, and is willing to serve as a fiscal sponsor for your program.
Doing so will provide valuable experience and reduce the learning curve to operating in a new jurisdiction. Life fiscal sponsorships in the US, there is typically a cost associated with working with a fiscal sponsor.
It is important to conduct due diligence on potential fiscal sponsors to ensure they have the capacity and financial strength to be good stewards of sponsored projects and funds.
Foreign Offices and Chapters
Nonprofits that wish to establish an ongoing presence or hire workers in a foreign country will first need to consult with a local attorney regarding legal requirements. Foreign nonprofit regulation, especially in the developing world, is extremely restrictive compared to the US. Many African and Middle Eastern countries require registration prior to holding even information meetings.
Not all countries permit foreign organizations to establish offices. Others permit it but with significant burdens.
Typically, the most restrictive countries are in the developing world where nonprofits are most interested in operating. Once an office is established in a foreign jurisdiction, it is subject to all of the laws of that nation with regard to hiring, firing, contracts, intellectual property, etc.
Separate Legal Entities
Nonprofits going global may prefer to establish a separate entity in a foreign country. Establishing a foreign entity governed by local citizens may be necessary to operate in some countries. Establishing a foreign entity can also help to empower the local residents to be more invested in the work of the organization and could help tap local sources of funding.
The separate legal entity can be affiliated with the US nonprofit by contract. Typically such affiliation agreements cover licensing of the name and marks, operating rules, reporting requirements, policies and procedures, dispute resolution, and termination provisions. In some countries, the US nonprofit can have additional protection such as a membership interest with reserved powers or approval rights.
Highly distributed nonprofits going global may further create a worldwide umbrella group, typically in a politically neutral jurisdiction such as Switzerland, and permit each global affiliate or each region to appoint a representative to the organization’s board. In this manner, the various global affiliates can coordinate their mission and strategy.
Depending on the requirements of each jurisdiction, it may make sense to collaborate with another NGO in some jurisdictions, open offices in others, and form separate entities for still others. While its ideal to have an operating model that is standard across all jurisdictions, that may not be possible or desirable in all cases.
Related Read: Foreign Aid and OFAC Sanctions
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.