I. What are the legal requirements for private foundations wishing to make cross-border grants?

Private foundations wishing to make a cross-border grant must ensure that:

1. The grant is clearly for a charitable purpose, and
2. The grant counts as a qualifying distribution for the purpose of meeting the foundation’s annual distribution requirement.

The easiest way for a private foundation to satisfy both of these requirements is to choose a grantee that is recognized by the IRS as a public charity.

If a private foundation chooses to make a grant to a non-U.S. organization that is not recognized by the IRS as a public charity the foundation must follow one of the two options provided in the tax code:

1. Determine that the non-U.S. grantee is the “equivalent” of a U.S. public charity (“equivalency determination”), or;
2. Exercise “expenditure responsibility.”[1]

a. What is Equivalency Determination?

Equivalency determination is a process designed to assess whether a potential non-U.S. grantee organization is the equivalent of a U.S. public charity. It involves collecting certain information from the grantee about its origins, activities and finances through an affidavit (see link below for sample affidavit). On the basis of the information provided in the affidavit, the private foundation then makes a good faith determination concerning U.S. public charity equivalency and documents that decision. The determination may be made by the private foundation on its own or relying on the written opinion of counsel or the potential grantee’s counsel. The process need not be complicated; many private foundations routinely conduct equivalency reviews of prospective grantees.

The following documents, translated into English, are necessary to make an equivalency determination:

1. Founding documents of the organization.
2. A description of the purposes of the organization as well as its past and present activities.
3. Dissolution provisions, either contained in the founding documents or applicable law (see link below to country notes).
4. Restrictions on private benefit, non-charitable activities, lobbying, and participation in political campaigns, either contained in the founding documents or applicable law (see link below to country notes)
5. Detailed financial records (excluding religious institutions or medical or educational organizations).

Advantages of Equivalency Determination

This method does not require grantee reports at the end of each accounting period, a separate account dedicated to charitable purposes, or detailed reporting on Form 990-PF.

Disadvantages Equivalency Determination

This method requires substantial documentation in English plus financial reporting from previous years.

b. What is Expenditure Responsibility?

Expenditure responsibility is a method of making direct cross-border grants to a non-U.S. organization whereby the private foundation assumes full responsibility for ensuring that its grant is used for a charitable purpose. The process need not be unduly burdensome for either the grantmaker or grantee. Private foundations may apply expenditure responsibility grants to their payout requirement if they take the following steps:

1. Undertake a pre-grant inquiry with reasonable determination that the intended grantee is capable of fulfilling the charitable purposes of the grant.
2. Conclude a grant agreement that includes spending and reporting responsibilities and commits the grantee to spend the money only for the specified charitable purposes.
3. Require grantee to maintain grant funds in a separate account for charitable purposes.
4. Require one or more reports from the grantee detailing how the funds have been spent.
5. Report the grant on the foundation’s form 990-PF.

Reporting for expenditure responsibility grants:

The U.S. Department of the Treasury requires that recipients of expenditure responsibility grants provide reports on how the funds were used. Existing IRS guidance does not provide clear answers on the following aspects of the reporting requirement: grants for capital equipment, grants for endowment, and reasonable efforts to secure reports from grantees. In the absence of guidance from the IRS, the Council on Foundations has made available its recommendations to international grantmakers in a letter to the U.S. Department of the Treasury: Guidance on Expenditure Responsibility: Council on Foundations Letter to Treasury (in PDF).

Advantages of Expenditure Responsibility

Because equivalency determination can occasionally be a lengthy and ultimately unsuccessful process (i.e., the prospective grantee turns out not to be the equivalent of a U.S. public charity), grantmakers often choose to exercise expenditure responsibility instead.

Disadvantages of Expenditure Responsibility

Grant reports are required from the grantee until all funds have been expended which may require monitoring the grant over a period of several years.

c. How do I decide whether to use Equivalency Determination or Expenditure Responsibility?

In 2001, the IRS made clear in a letter to the Council on Foundations that a private foundation wishing to make a grant to a foreign organization could choose between expenditure responsibility and equivalency determination, and that there was no obligation to rule out equivalency before turning to expenditure responsibility.

The Legal Dimensions of International Grantmaking article, “Equivalency or Expenditure Responsibility? A Guide in Plain English,” Betsy Buchalter Adler and Stephanie L. Petit of Silk, Adler & Colvin, provides a useful matrix to help determine which technique to use:[2]

Table 1: When There Is No Choice

Table 2: When the Grantor Can Choose

Footnotes

[1] Rules for the Road p. 24.

[2] Betsy Buchalter Adler and Stephanie L. Petit of Silk, Adler & Colvin. Legal Dimensions of International Grantmaking “Equivalency or Expenditure Responsibility? A Guide in Plain English,” (in PDF) 2nd Quarter 2005.

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