Foreign charitable foundations and other charitable entities with non-United States (U.S.) held financial accounts can receive a preferential withholding tax rate under the U.S. qualified intermediary (QI) program, in respect of U.S. securities holdings, should they qualify for this preference based on an equivalency determination by a U.S. admitted attorney. The normal U.S. withholding rate for foreign entities not taking advantage of a tax treaty is 30%.

As explained under the U.S. Tax Code and associated rules for foreign charitable foundations and other charitable entities, if a foreign foundation or entity is considered 'equivalent' to a U.S. recognized charitable entity (defined by the Internal Revenue Code Section 501(c), it may be considered eligible for a tax exemption that in most cases would place it into a 4% withholding tax pool. A thorough review of the foreign foundation's or entity’s structure, articles, statutes and financial statements, along with the audited accounts and board minutes, will be necessary for a U.S. admitted attorney to render an opinion (equivalency determination) regarding that foundation's status in relation to the US Tax Code.

The factors include:

  • the form of the foundation (which is quite broadly defined);
  • its purposes;
  • its operational structure;
  • the powers conferred upon the board or other governing body;
  • the lack or presence of non-charitable activities or income;
  • the procedure and distribution of income;
  • the status and identity of beneficiaries of income; and
  • the procedure upon dissolution of the foundation.

There will be a final determination as to whether the foundation is public or private, and this will determine the withholding tax rate between 0% and 4% respectively. However, most foreign foundations entities will be classified as private and be subject to the 4% rate.

Once a U.S. admitted attorney has made these determinations, the opinion must be attached to a W-8EXP form for the QI institution to rely upon the claim made by the foreign foundation or entity regarding its charitable status. The U.S. regulations allow QI institutions to rely on the claim. This determination procedure is appropriate for foreign charitable foundations and other charitable entities that lack significant contacts with the U.S. and merely receive gross investment income as a result of investment in the U.S. markets of the foundation capital. However, if the foreign foundation or entity solicits or receives any donations or grants from the U.S., the foundation may be required to apply for a formal determination from the U.S. Internal Revenue Service and may be subject to U.S. reporting requirements. On the other hand, if the foundation merely invests in U.S. markets, an equivalency determination opinion may be all that is required.

For further information on this topic please contact John McBrayer at Secretan Troyanov by telephone (+41 22 789 70 00)or by fax (+41 22 789 70 70) or by email (john.mcbrayer@secretantroyanov.com). The Secretan Troyanov website can be accessed at www.secretantroyanov.com.

This article has been prepared by Secretan Troyanov for informational purposes only and is not legal advice. Transmission of the information is not intended to create, and receipt does not constitute, an attorney-client relationship. Readers of this article should not act upon this information without seeking professional legal advice applicable to their specific circumstances.