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A question of control

Discrimination is the norm in taxation of

philanthropy, says Koele. Her thesis com-

pared the USA, Germany and the Nether-

lands. While we think of America as a fa-

vourable environment for philanthropy, it

is less so internationally. Koele believes the

US system over-regulates, while the Dutch

have a liberal, flexible system with opennorms. Germany falls in between, though

it shares Americas fondness for detailed

legislation. Why do countries tax interna-

tional philanthropy? Theres only one ex-

planation. That explanation is control, says

Koele. States are very afraid that they can-

not control an international charitable flow

of money directly, they cannot control the

final destination of the funds. In her opin-

ion, states have a legitimate concern, which

should be respected. But it does not justify

the harshness of a landlock.

Establishing equivalency

It is not that hard for states to control cross-

border flows of charitable funds. Koele

focuses on two methods. The first is a due

diligence procedure, like expenditure re-

sponsibility in the USA, where foundations

ensure their grants are used for the intend-

ed charitable purposes and then report to

the tax authorities on grant expenditures.

The second is to establish normative equiv-

alency requirements so grant-makers can

consider a foreign entity as equivalent to a

domestic charitable organisation, then re-

port this to the authorities. Koele believes

the most practical way to obtain informa-

tion on the equivalency of a foreign-based

charitable organisation is to get an opinion

from two lawyers, one in the donors coun-

try and one in the recipients. The lawyers

together form an opinion. This, along with

supporting papers, is passed to the tax au-

thorities in the donors country. It works

very well, says Koele. She considers it na-

ve to think the tax authorities are going

to do thisits far too difficult for them.

So mediation by two lawyers is the easiest

solution. On compliance, Koele believes

foreign charitable organisations should be

responsible to domestic tax authorities and

should meet the equivalency conditions

set by domestic tax law. Donors to these or-

ganisations should be protected from the

consequences of not meeting these condi-

tions. But with a foreign private foundation,its logical that the local donor should be

responsible for the tax consequences to-

wards the domestic tax authorities.

Releasing the landlock: The Dutch

example

On 1 January 2008, the Netherlands fully

opened its philanthropic landlock. This fol-

lowed European Commission pressure to

end discrimination against cross-border

giving in the European Union. The Nether-

lands has long had a liberal environment for

philanthropy and civil society. In fact before

2008, there was not even a registration re-

quirement. Under the new law, there is full

exemption from gift tax for cross-border

donations, and full income tax deductibility,

for both individual and corporate donors.

Even a non-resident with taxable income

in the Netherlands can benefit from these

tax breaks. EU and US foundations can also

do business in the Netherlands, whether re-

Unlocking cross-border fundingBy Nyegosh Dube, EFC

Philanthropy increasingly crosses national borders, yet tax laws remained nationally based andVFDOEHQHWVIRUJLYLQJDUHODUJHO\ODQGORFNHGORFNHGEHKLQGERUGHUV:K\LVWKLVDQGZKDWcan be done? These are the questions that Ineke Koele, a noted Dutch international tax lawyer,

tackled in her recent doctoral thesis International Taxation of Philanthropy, now publishedDVDERRN,WLVSHUKDSVWWLQJWKDWKHUFRXQWU\KDVWDNHQWKHPDMRUVWHSRIIXOO\UHOHDVLQJLWVODQGORFNWKHUVWQDWLRQWRGRVR

Ineke Koele, Attorney-at-law,OurNewOffice

scen

e

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European Foundation Centre | www.efc.be

lated to their mission or not, and are exempt from profit taxes if 90% of

the profits are for charitable purposes. But there are strings attached:the beneficiaries must be EU or US-based and register in the Nether-

lands, meeting the same requirements as their Dutch counterparts.

The tax authorities can also revoke an organisations registration if they

discover its activities do not meet requirements. But this is unlikely as

there is no control whatsoever according to Koele. Someone could, for

example, give their income away tax-free to a private foundation in Italy

and later make private use of this money, so tax evasion is possible.

Two philosophies

Koele identifies two 'political philosophies' behind tax benefits: plural-

ism and the more traditional tax expenditure theory. Pluralism is the

leading philosophy, especially in the USA and Germany, and holds that

the public interest is not a state monopoly; foundations and civil soc-iety organisations are essential in a pluralistic democracy. This leads to a

principled tax exemption for philanthropic flows of money, domest-

ically and internationally. The tax expenditure philosophy, in contrast,

holds that charitable organisations relieve the states burden of carrying

out certain tasks, so tax breaks might be viewed as de facto state tax

spending. But Koele disagrees : philanthropic organisations are not do-

ing solely what otherwise would have been done by the government.

This approach by a state leads to protectionism with preferential tax

treatment being given by a state only to activities deemed directly to

benefit the state and its citizens. Koele points out: modern societies

have an open relationship with the world so purposes that are in the

interests of a certain populace are never limited to their own national

borders.

Resolving the landlock: The way forward

Koele believes developing appropriate equivalency requirements with

due diligence procedures is the key to resolving the landlock. For equiv-

alency, states should distinguish between essential and non-essential

requirements and focus on the former. Once these requirements are de-

termined, national laws can be amended, although it would be better

if the requirements and procedures were established through bilateral

or even multilateral treaties. But treaties should leave some space for

local interpretations, otherwise I dont think states would adopt such

a solution, says Koele. What helps make this approach a realistic solu-

tion to the landlock, in Koeles view, is that in comparing national tax

systems, the similarities are far more obvious than differences. There is

a very large overlap, so the problem is not as big as many people think.

The various Commission infringement procedures and European Court

of Justice decisions have also helped move things forward and are al-

ready bringing major changes in national laws. Ultimately, says Koele,

the case for removing tax barriers is best served by dialogue on how we

can resolve these barriers in a responsible way, taking into account the

concrete concerns of states.

For further information see: www.OurNewOffice.nl

Endowment creation and grant-making

The law provides for two ways of creating an endow-

ment: within an NPO itself and by establishing a spe-

cialised organisation (or special fund). In the rst

case, the NPO creating an endowment is itself the

beneciary, and in the second, other NPOs are ben-

eciaries. (Individuals cannot be direct beneciaries).

NPOs that create endowments within their own as-

set structure (as opposed to setting up special funds)

cannot transfer their income from these endowments

to other NPOs. But in reality many NPOs, especially

foundations, give grants to other NPOs to fund these

organisations socially benecial programmes and

projects. Consequently, it does not make much sense

for such NPOs to create internal endowments as they

cannot spend the income from them on their statu-

tory activities.

Goals and sources

Another problem is that an endowment can be created

only for certain purposes specied by the law: educa-

tion, science, health care, culture, physical education

and non-professional sports, art, archive-keeping,

and social issues. So NPOs operating in environmental

Russias

endowment law:

Opportunities

and obstaclesBy Anastasia Kumaritova, Charities Aid

Foundation Russia

Russias law on the creation and useof endowments (Federal Law no 275-F3), adopted in December 2006, gaveQRQSURWRUJDQLVDWLRQV132VLQRussia an important source of stablefunding for their statutory activities.Under this complex law, NPOs cantransfer endowment assets to assetmanagement companies to generate anincome stream from these endowments.But, despite this instruments apparentattractiveness for philanthropicinvestment, Russian NPOs are notrushing to make use of this opportunity.Why? Wary of potential abuses, law-makers have peppered the law withrestrictions which have becomeobstacles to endowment creation.

11 | Eectsummer 2008

"States are very afraid that theycannot control an internationalFKDULWDEOHRZRIPRQH\GLUHFWO\WKH\FDQQRWFRQWUROWKHQDOdestination of the funds.

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