10 | Eect summer 2008 European Foundation Centre | www.efc.

be
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, exible system with open
norms. 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 ow
of money directly, they cannot control the
nal 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 ows of charitable funds. Koele
focuses on two methods. The rst 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 difcult 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 benet from these
tax breaks. EU and US foundations can also
do business in the Netherlands, whether re-
Unlocking cross-border funding
By Nyegosh Dube, EFC
Philanthropy increasingly crosses national borders, yet tax laws remained nationally based and
scal benets for giving are largely landlocked, (locked behind borders). Why is this, and what
can 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 published
as a book. t is perhaps tting that her country has taken the major step of fully releasing its
landlock, the rst nation to do so.
Ineke Koele, Attorney-at-law,
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European Foundation Centre | www.efc.be
lated to their mission or not, and are exempt from prot taxes if 90% of
the prots are for charitable purposes. But there are strings attached:
the beneciaries 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 identies two 'political philosophies' behind tax benets: 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
benet 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.OurNewOfce.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 obstacles
By Anastasia Kumaritova, Charities Aid
Foundation Russia
Russias law on the creation and use
of endowments (Federal Law no 275-
F3), adopted in December 2006, gave
nonprot organisations (NP0s) in
Russia an important source of stable
funding for their statutory activities.
Under this complex law, NPOs can
transfer endowment assets to asset
management companies to generate an
income stream from these endowments.
But, despite this instruments apparent
attractiveness for philanthropic
investment, Russian NPOs are not
rushing to make use of this opportunity.
Why? Wary of potential abuses, law-
makers have peppered the law with
restrictions which have become
obstacles to endowment creation.
11 | Eect summer 2008
"States are very afraid that they
cannot control an international
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destination of the funds.
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