Pursuant to Internal Revenue Code § 170, contributions to certain charitable organizations are tax-exempt. Generally, contributions to foreign organizations are not tax-deductible. Certain foreign organizations, however, can be treated as private foundations that are tax exempt by the IRS. Those foreign organizations granted the tax exempt status from the IRS, however, are subject to a 4% excise tax on any gross investment income received from United States sources or any territory of the United States. There is, however, an exception; If the foreign country in which the organization is established and the United States have a tax treaty in place specifically exempting all income received by the foreign organization, it will be exempt from the 4% excise tax.
Foreign organizations that receive at least 85% of their support, excluding gross investment income, from sources outside the United States are not subject to taxes on:
- Self-dealing pursuant to Internal Revenue Code § 4941;
- Failure to distribute income pursuant to Internal Revenue Code § 4942;
- Excess business holdings pursuant to Internal Revenue Code § 4943;
- Investments that jeopardize charitable purposes pursuant to Internal Revenue Code § 4944; and
- Taxable expenditures pursuant to Internal Revenue Code § 4945.
These foreign organizations are also not subject to Internal Revenue Code § 507, relating to termination of private foundation status, and Internal Revenue Code § 508, regarding special rules for giving notice that they are applying for recognition of exempt status.
If the foreign organization is warned by the IRS that an act or failure will be treated as a prohibited transaction if another act or failure occurs again, the subsequent act or failure does not need to be related to the first act or failure to be considered a prohibited transaction. If the foreign organization continues to repeatedly engage in acts or failures prohibited to domestic organizations that would normally subject those domestic organizations to taxes and sanctions, then the foreign organization risks losing its tax exempt status.
If a foreign organization loses its tax exempt status, it may reapply for the exemption by filing Form 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code.