In the course of philanthropic business or collaborative efforts, nonprofits based in the U.S. may wind up donating funds to a foreign tax-exempt organization. Transnational donations are, by default, subject to a 30 percent withholding in accordance with the Foreign Account Tax Compliance Act (FATCA). Though FATCA was enacted in 2010, the IRS in recent years has increased scrutiny of any foreign transactions. Nonprofits that give grants or donations to foreign charities must follow specific guidelines and maintain thorough documentation in order to avoid the 30 percent levy.
Proof needed for exemption
Through proper documentation, nonprofits can avoid FATCA’s withholding penalty via IRS Form W-8BEN-E by demonstrating that the foreign organization qualifies to be supported by a domestic nonprofit. Here are some important points to keep in mind about completing this form.
- The foreign organization receiving the funds completes Form W-8BEN-E and provides it to the donating U.S. nonprofit, which keeps it on file.
- Much like the Forms W-4 employers retain for each employee, Form W-8BEN-E is not filed with the IRS.
- Once completed, the Form W-8BEN-E is valued for three years.
- The IRS requires that organizations include the following with the signed Form W-8BEN-E:
- IRS determination letter of 501(c)3 status if the foreign group was based in the U.S., or
- A copy of an opinion from U.S. counsel certifying that the recipient of the donation is a section 501(c)3 organization (without regard to whether the payee is a foreign private foundation).
- Tip: Providing copies of bylaws, articles of incorporation, copy of the country’s exemption status/law to support the confirmations listed above will help form an opinion to accompany the form.
Assistance Completing Form W-8BEN-E
Substantiating donations to fellow tax exempt organizations is always important for nonprofits, but with recent IRS focus on foreign transactions, it is particularly important that the proper forms are completed and documentation maintained. RKL has a team of tax professionals focused exclusively on the needs of nonprofits, and they are ready to answer questions about the process or help organizations complete Form W-8BEN-E and gather the correct documentation. Contact one of our local offices for guidance or assistance.
Contributed by Stephanie E. Kane, CPA, Supervisor in RKL’s Tax Services Group. Her client responsibilities include serving clients in a wide variety of industries with a focus on not-for-profit entities.