U.S. NPOs can operate overseas, but various legal and regulatory issues must be taken into account to ensure compliance.
In order for U.S. based public charities to grant funds to foreign charities, they must retain “discretion and control” over fund use to ensure the grants serve specific and approved purposes. Private foundations are stricter; they must either exercise “expenditure responsibility” or obtain an “equivalency determination” to ensure the foreign charity is equivalent to a U.S. public charity. Expenditure responsibility involves constant oversight and reporting to confirm charitable use. An equivalency determination requires a qualified tax practitioner to affirm the foreign entity’s compliance with U.S. public charity standards.
U.S. tax laws, including restrictions on lobbying, political activities, intermediate sanctions, and unrelated business income tax (UBIT) rules, apply internationally. NPOs must ensure compliance with local and U.S. regulations. U.S. NPOs must understand the legalities of the countries operated in as the local legal requirements may include various registrations and licenses. What is permissible under U.S. law might be illegal elsewhere.
Additionally, NPOs must comply with the Foreign Corrupt Practices Act (FCPA), which prohibits payments to foreign government officials to obtain or retain business, to avoid severe penalties. Additionally, NPOs must also avoid transactions with individuals or entities listed on the Specially Designated Nationals List (SDNL) maintained by the Office of Foreign Asset Control (OFAC). NPOs must consider U.S. sanctions targeting specific foreign countries, regimes, terrorists, and other entities.
U.S. NPO organizations must report foreign financial accounts exceeding $10,000 to the Report of Foreign Bank and Financial Accounts (FBAR). Non-compliance may result in fines up to $10,000 for non-willful violations and up to 50% of the account value or $100,000 for willful violations.
NPOs can form “Friends of” organizations, U.S. based entities that support foreign charities, allowing U.S. donors to contribute and receive tax deductions while easing administrative burdens on foreign charities. For NPOs conducting direct activities abroad that serve a charitable purpose, monitoring and reporting is essential. Charitable giving by U.S. charities to foreign entities demands strict scrutiny to ensure the foreign program would qualify as a 501(c)(3) in the U.S., along with detailed fund usage accounting.
NPOs must engage with U.S. government agencies when operating overseas. The Office of Foreign Asset Control (OFAC) enforces economic and trade sanctions, and the U.S. Department of State classifies certain countries as State Sponsors of Terrorism, requiring specific licenses from OFAC for activities in these nations. The U.S. Department of Justice (DOJ) ensures compliance with these sanctions in collaboration with OFAC.
