There are many reasons for a nonprofit organization to expand operations into other countries. However, doing so involves critical considerations that may seem prohibitive to nonprofit leaders without prior expansion experience. The process is easier to navigate when you work with experienced, knowledgeable advisors who serve your industry.
Here’s a quick introduction to the types of considerations nonprofits must be aware of as they move operations, products or services into another country.
To start, key considerations include:
What types of products or services are you considering moving or using offshore?
- Hosting seminars
- Providing operational support for other NGOs outside of the U.S.
- Making grants
Where will your organization be located?
Location is often dictated by the cause or activity you’re pursuing, or demand from a specific jurisdiction. Consider factors such as talent availability when looking at locations.
Have you covered the regulatory framework around the product or service?
It’s critical that licensing is done in a correct and appropriate manner. Each country’s laws are different, so most organizations benefit from having legal counsel in both the U.S. and the local country.
What taxes should you be aware of?
When moving to another country, there are three key tax considerations:
- Indirect tax – Similar to Sales and Use Taxes, outside of the U.S. organizations will encounter indirect tax, such as the Value-Added Tax (VAT) or Goods and Service Tax (GST).
- Individual tax – This is a tax incurred by individuals spending time in another country under your organization.
- Corporate tax – An organization’s not-for-profit status may not extend to the activity or country involved. This tax may be avoidable with correct planning and the right activities.
Who will be your point person?
People are a primary consideration for nonprofits expanding into other countries. Have a point person who is responsible for the expansion or activity who manages the details and service providers like attorneys and accountants.
Do you have a good financial system in place?
You’ll need to track activities, both for local purposes should you need to file requirements in another location, and for the U.S. to properly report that activity on your Form 990.
Grant Making Best Practices
Take care to involve the appropriate attorneys to make sure you’re covering your duty of care in terms of grant making. Private foundations may either exercise the expenditure responsibility or obtain an equivalency determination when making grants to foreign NGOs.
Public charities are not subject to the same requirements, but their boards have a responsibility to exercise reasonable care in making grants to ensure the grants aren’t diverted from their charitable purpose. Accordingly, many lawyers representing public charities advise they follow the private foundation roles.
Potential Exposure and Taxation in a Foreign Country
Typically, the first step to global expansion is to send people. This in and of itself could reveal types of exposure and create obligations. For instance, sending employees overseas could create a taxable presence.
- Will the employer have to withhold foreign income tax and report foreign income for the employee?
- Will the employee have to file a foreign income tax return and pay foreign tax?
- Will the organization need to register for business in a foreign country?
- Will the organization need to comply with foreign tax filings?
Creating a Taxable Presence
You must determine whether your activity will cause a taxable presence. Typically, an organization would need to create what is known as a permanent establishment. This means a fixed place of business through which activities are carried out. This term is defined by income tax treaties, but also applies without one. Many countries adopt this in their local law.
Today, the standard of permanent establishment is changing. Most U.S. treaties say you must have a fixed place of business to create a permanent establishment, but the economy has gone digital and these rules must be restructured to reflect and tax services delivered digitally.
How has this more digital economy impacted sales tax considerations for nonprofits?
Some countries, such as Canada, already have a permanent establishment concept based on services without a physical fixed place of business. If an organization generates a certain amount of revenue from the services, that could qualify them as having a fixed place of business.
An employee with the authority to enter into contracts on your behalf and represent you in that country, and who does so regularly, could also qualify your organization as having a permanent establishment.
In addition to tax treaties, there are agreements that determine whether or not an activity could create a taxable presence. Work with your attorney to understand whether such agreements would apply. Types of agreements include:
- Technical cooperation agreements
- Strategic objective grant agreements raising provisions
- Memoranda of understanding
- NGO bilaterals
Licensing and Withholding Tax
Organizations can license concepts they’ve developed in the U.S. for use in other countries, such as educational platforms. It’s important to be mindful of licensing. The license fees an organization would pay you to use your platform are subject to withholding tax, which can be as much as 30%.
When going into a new country, one of the first things an organization will encounter is an indirect tax. Most countries outside of the U.S. apply VAT as indirect tax, though several apply GST. Each country has its own rules. You may be obligated to register, collect and remit the VAT even if you don’t have a taxable presence there for income tax.
VAT is similar to a Sales and Use Tax, however:
- It does apply to services and digital products you encounter outside of the U.S.
- It is collected along the supply chain as opposed to being applied only at the end consumer.
This means if you purchase materials from a vendor outside of the U.S. and then sell to another organization outside of the U.S., you would pay VAT to the supplier and charge VAT to the customer.
If you have a permanent establishment or physical presence, those treaties are not applicable to indirect tax. This means the goods and services may be zero or reduced rated. Rules are specific to the country and to the goods and services. You’ll still have to register for and administer the VAT, but you would place a zero rate on these items. Examples of potentially zero-rated goods include:
- Medical supplies and equipment
- Goods and aids for disabled people
- Rescue equipment and vehicles
- Scientific equipment
- Construction and building supplies
In some countries, you could have an obligation to withhold and report employees’ foreign income. The employee may also have an obligation to file a foreign income tax return and pay income tax. Individual taxation often drives organizations’ decisions around having separate entities in another country, as it would require that they register for income tax withholding for employees.
Tax Treaty Application
In countries where the U.S. has a tax treaty, your organization would not be required to register, withhold and administer employee taxes and the individual would not be subject to income tax if the employee is in the country no longer than a specified number of days, usually 183. Most countries have nuances about how they count those days. It helps to have a mechanism to track the days for an individual.
To qualify, the employer must not have a taxable presence in the country which bears the cost of the services.
Short Term Business Travelers
Many countries who do not have treaties with the U.S. Organizations frequently run into issues with short-term business travelers. You must be cognizant of where and how they are traveling. This means having a tracking mechanism. Oftentimes, organizations use expense reports, travel agent reports, etc. It’s best to get your employees into a calendar tracking system.
Global mobility is a long-term strategy with its own considerations. Employees will stay in another country longer, so they will create a taxable presence for themselves. It’s important to develop a company policy around what the company needs to consider for each assignment.
Often, organizations enter into a secondment agreement that provides the details of the individual’s role, how they will get paid, what the employer will provide during the assignment (e.g. housing, car), and whether the individual’s taxes will be equalized.
Tax equalization helps an employee maintain the tax position they would have been in had they not taken the assignment. In another country, an employee will likely have more of a tax obligation than if they stayed in the U.S. With equalization, the organization makes the employee whole for additional taxes paid.
For global mobility, organizations must also be diligent in managing payroll and withholding. You must decide where the individual will be paid from, either the home or host country. Sometimes, it’s necessary to keep the individual on U.S. payroll, even though they’re being paid out of another jurisdiction’s payroll, then do a shadow payroll. With this, you’re essentially acting as if they’re being paid from the U.S. organization and paying in the proper taxes.
Also relevant to global mobility, when companies put employees on assignment, they typically take over the obligation of helping to get the tax returns filed. It minimizes risk for the individual and also for the company.
A few U.S. tax reporting requirements to know:
- Form 5471, 8858, 8865 – foreign entity set-up
- Form 990 schedule F – activities OUS
- FBAR (Form 114) – Foreign Bank Account
- Form 5713 – Int’l Boycott Report
It helps to work with your tax advisors to understand what obligations you might have.
We’ve entered into a more digital era, and new ways of thinking may be necessary for nonprofits to thrive. Which areas should you focus on?
There might also be an issue of reporting engagement in foreign investments. If you are entering into transactions where you're investing in foreign companies, it’s important to talk about whether that investment is subject to the PFI regime or any other compliance requirements.
The reason for this is PFICs, which are organizations with a lot of passive income. The test to be a PFI is:
- 75% Gross income is passive
- 50% of Net Assets are passive
- If no UBTI, no reporting
- If value of the PFI stock is less than 25k (direct) or 5k (indirect) and there is no recording, no reporting
Other potential compliance requirements to consider include:
- Business registration
- Licenses and Permits
- BE-10 (FINCEN) – Foreign Entity
Whether you are currently expanding your operations into other countries, or considering the implications of doing so in the future, we recommend breaking down your goals to help understand what legal, compliance and reporting you may be faced with in each new country. Determining the types of products or services to offer, the number of employees and their type of work, as well as other organizations you may be investing in are key areas to start.