Donation Tax Deductibility by Non-U.S. Employees to Their U.S.-Based Emergency Financial Assistance Fund

Multinational companies often ask about how a U.S. employee emergency relief fund might operate with respect to foreign employees. One potential issue is the availability of charitable income tax deductions for donations from international employees. Generally speaking, it is difficult for foreign-based employees to get charitable tax deductions for foreign charity donations, because local tax authorities usually only allow deductions for donations to registered local charities.

One recent example is the Canadian government’s delisting of foreign charities, making it difficult for Canadian citizens to receive deductions for donations to foreign charities, including US 501(c)(3) public charities.[1] The applicable tax treaty allows Canadians donating directly to U.S. charities only to deduct donations to the extent of U.S. source income. Similar treaty provisions apply to Mexican citizens and Israeli citizens.[2]

There are similar policies in place throughout the English-speaking world and Europe. Most countries require the charity to be registered and operated locally, including nations such as the United Kingdom[3] and Ireland.[4] There are limited exceptions in the cases of Italy and New Zealand, which have more relaxed standards, and allow foreign charities to register.[5]

Despite these harsh policies, the trend in Europe is toward allowing deductions for cross-border donations within the confines of the EU.[6] This means that large companies may be able to incentivize employee donations to relief funds by setting up a sister organization in a European country with less stringent standards for charities, such as Italy or the Netherlands. Nonetheless, companies with foreign branches have additional considerations beyond U.S. legal requirements when it comes to setting up an employee emergency relief fund. It is important to examine these factors to create the best possible feeling of company as community, even across borders.

This information should not be relied on as tax or legal advice. You should seek your own counsel for such advice.

[1]Robert B. Hayhoe & Andrew Valentine, Charity rules, http://www.millerthomson.com/assets/files/article_attachments/Charity_Rules.PDF.

[2]Jane Peebles, Cross Border Gifts, http://www.pgdc.com/pgdc/cross-border-gifts.

[3]David Ainsworth, No foreign organizations recognized as charitable for tax purposes in the past year, HMRC figures reveal, http://www.thirdsector.co.uk/no-foreign-organisations-recognised-charitable-tax-purposes-past-year-hmrc-figures-reveal/finance/article/1135660.

[4]Irish Tax and Customs, Non Resident Charities authorized @ 1st July 2014 under the Scheme of Tax Relief for Donations to eligible Charities, http://www.revenue.ie/en/business/authorised-charities-non-resident.html.

[5]New Zealand Inland Revenue, Guidelines for non-resident charities, http://www.ird.govt.nz/charitable-organisations/chart-orgs-non-res-charities/. Transnational Giving Europe, Cross-Border Country Profile – Italy, http://www.transnationalgiving.eu/uploadedFiles/TGE/Cross_border/TGE_EFC_CountryProfile_2014_Italy.pdf.

[6] Transnational Giving Europe, About TGE, http://www.transnationalgiving.eu/tge/details.aspx?id=219940&LangType=1033