[
Foreign Foundations
]
San Juan, Puerto Rico, May 15, 2002
BRIAN ROWBOTHAM
KENT D. LAWSON
ROWBOTHAM AND COMPANY LLP
ACCOUNTANTS AND INTERNATIONAL TAX CONSULTANTS
San Francisco
400 Montgomery Street, Suite 600
San Francisco, CA 94104
Tel: (415) 433-1177
Fax: (415) 433-1653
email: br@rowbotham.com
klawson@rowbotham.com
www.rowbotham.com
[
U.S. § 501(c)(3) Foundation
]
U.S. RESIDENT
deduction for fair
market value
of appreciated
public stock
limited annually
to 20% of AGI
U.S.
PRIVATE
FOUNDATION
o
o
o
o
IRS registration
public disclosure
annual reporting
private foundation rules
Tax-free Stock Sale
Rowbotham
& c o m p a n y llp
2
[
U.S. Private Foundation Rules
]
In general the private foundation rules prohibit:
•self-dealing between a foundation and its founders and managers
•annual distributions of less than 5% of foundation asset value
•excess business holdings of more than a 20% equity stake
•jeopardizing investments in a concentrated portfolio
•prohibited expenditures including most grants to individuals,
non-public charities, and non-operating private foundations
Rowbotham
& c o m p a n y llp
3
[
Non-exempt Foreign Foundation
]
U.S. Resident
NO
DEDUCTION
FOREIGN
o
o
o
o
NO IRS REGISTRATION
NO PUBLIC DISCLOSURE
NO ANNUAL REPORTING
NO PRIVATE FOUNDATION RULES
FOUNDATION
FOREIGN
CORPORATION
Rowbotham
& c o m p a n y llp
TAX- FREE
STOCK SALE
4
[
Foreign Foundations
]
• Private U.S. Foundation (§509(a))
• Private Foreign (Registered with IRS) Foundation: (§509(a))
• Foreign Charitable Foundation (Registered in local
jurisdiction only)
• Foreign Charitable Foundation (Not registered,
Charitable provision in articles)
• Foreign Foundation with Charitable and
Non-charitable Provisions
Rowbotham
& c o m p a n y llp
5
[
]
Classification of Foreign Foundations
Registered Charitable Foundation - Isle of Man
Foundations - Liechtenstein
Star Trusts - Cayman
Possible Classifications under U.S. Tax Law:
(1)
(2)
(3)
(4)
(5)
(6)
Rowbotham
& c o m p a n y llp
Qualified Foundation (§509(a))
Foreign charitable foundation (Income Tax Treaty)
Non-exempt foreign foundation
Foreign trust [§7701(30) & (31)]
Foreign corporation [§7701(3) & (5)]
Controlled foreign corporation (§951 - §960)
6
[
Non-exempt Foreign Foundation
]
The potential risks posed by non-exempt foundations to U.S. founders
require analysis in several areas:
• gift tax pursuant to section 508(d)(2)(b)
• classification as a foreign corporation or trust
• form 3520 reporting by recipients of grants
Rowbotham
& c o m p a n y llp
7
[
vs. Taxation of Foreign Foundation
]
Investment Income
U.S. Source
Unrelated Business Income on
Effectively Connected Income
Foreign Charitable Foundation
4% exercise tax
Corporate tax rates
Non-exempt Foreign Foundation
30% on most investment income
“portfolio interest” exempt
Ordinary income tax rates
Foreign Corporation
Complicated pass-through
tax issues
Corporate tax rates
plus branch profit tax
Complicated pass-through
tax issues
Ordinary income tax rates
Foreign Trust (nongrantor)
Rowbotham
& c o m p a n y llp
8
[
Non-exempt Foreign Foundation
]
The risks posed to U.S. founders by non-exempt foreign foundations
can be minimized through:
• contribution of assets before appreciation
• use of the one million dollar life time gift tax exemption
• design of the foundation structure
• choice of jurisdiction and entity type
• drafting of organizing documents
• formal tax advice
• careful reporting
Rowbotham
& c o m p a n y llp
9
[
]
§ 508(a) Registered Foreign Foundation
NONRESIDENT
FOREIGN
FOUNDATION
o registration with the IRS
o subject to reporting and disclosure
o subject to private foundation rules
o limited deductions
o minimizes risk regarding classification
o enhances ability to receive grants and contributions
ASSETS
Rowbotham
& c o m p a n y llp
10
[
§ 4948 85% Foreign Foundation
]
NONRESIDENT
FOREIGN
FOUNDATION
o
o
o
o
exemption from IRS registration
exemption from private foundation rules
minimal risk regarding classification
useful for pre-arrival and expatriation planning
ASSETS
Rowbotham
& c o m p a n y llp
11
[
]
U.S. & Foreign Foundations
Tax Treatment of Differing Types of Foundations
U.S. tax § 508 registration Subject to §§
exempt
with IRS
4940 to 4945
status
required
private foundation
excise taxes
§§ 871, 4940
and 4948
tax rates
§ 170 income § 873 income § 2055 estate § 2106(a)(2) § 2522(a)
§ 2522(b)
tax deduction tax deduction tax deduction estate tax
gift tax
gift tax
for residents
for
for citizens deduction for deduction for deduction for
nonresidents and residents nonresidents citizens and nonresidents
residents
U.S. § 501(c)(3) Foundation
Y
Y
Y
2% excise
Y
Y
Y
Y
Y
Y
Non-exempt Foreign Foundation
N
N
N
30% withholding
N
N
N
N
N
N
§ 508(a) Registered Foreign Foundation
Y
Y
Y
4% withholding
N
N
Y
N
Y
N
§ 4948 85% Foreign Foundation
Y
N
N
0% or 4% withholding
N
N
Y
N
Y
N
Rowbotham
& c o m p a n y llp
12