US citizens (and other individuals subject to US income tax) who are resident in the UK, may be subject to tax in either the US or the UK when they make contributions to charity unless the charity is dual qualified. The problem arises because the US income tax charitable deduction is only available for gifts to charities organised under the laws of the US, whilst UK tax relief is only available for contributions made to charities established in England and Wales and governed by English law.
This means that a donation made to a US charity supporting an English charity will not qualify for UK gift aid, nor will a US individual's contribution to an English charity supporting a US charity qualify for a US income tax charitable deduction (unless it is dual qualified).
To remedy this problem and ensure that the same charitable gift qualifies for tax benefits in both countries, the following structure has been developed. A US charitable company, which is an exempt organisation under IRS code sections 501(c)(3) and 170(c) should establish an English charitable company. The English charity would be organised as a company limited by shares, rather than by guarantee, although its constitution will still contain the usual profit distribution prohibitions. The constitution will therefore contain the same restrictions as a standard charitable guarantee company, except that it will have paid up share capital of, say, £100. These shares will be owned by the US charitable company.
For US tax purposes only, the US charity may elect for the English charity to be treated as a "disregarded entity". This means that the English charity will, for US tax purposes, function as a branch of the US charity. For all English law purposes, and for UK tax purposes, the English charity will be a separate, independent entity, and will therefore qualify for gift aid. For US corporate (rather than tax) purposes, the US charity and the English charity will be regarded as completely separate entities.
The effect of this is that a US donor of a charitable gift to the English charity will be treated as having made a qualifying gift for gift aid purposes. The English charity can make a claim for the repayment of the basic rate of tax associated with the gift (i.e. gift aid) and the donor can claim higher rate tax relief. The same gift will, for US tax purposes, be treated as made to an overseas bank account of the US charity. This will therefore qualify for US tax relief because the US charity could provide a tax receipt to substantiate the deduction for the donor.
In practice, the arrangement should work smoothly and has been implemented by a number of organisations including the Charities Aid Foundation.
Administration of a dual qualified charity
The key to the success of the dual qualified charitable structure is independence. The English charity must operate independently of its US parent at all times and must have the final decision regarding grants and expenditure. For these purposes, it would be helpful if the majority of the English charity's directors are UK resident and it should be administered from within the UK. Conversely, the majority of the US parent's directors must not be UK resident for, although the English company is transparent for US tax purposes, the US entity is not registered with the Charity Commission and could therefore be subject to UK tax on all its income if it were to become UK resident.
In terms of grant making, the directors of the English charity should resolve, in their discretion, to distribute the funds raised by the dual qualified structure to a charity of their choice, provided that the recipient qualifies for a grant under the laws of England and Wales, the laws of the United States and the laws of the state in which the US company is incorporated. This should not represent too much of a problem because of the similarity between US and English charity law.
This structure should still work even if the US charity is classified as a private foundation. However, private foundations are subject to additional restrictions both in the manner in which they are allowed to operate and the extent of the US tax deduction permitted to the donor.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
