Can a Nonprofit Award Grants Abroad?

In short: Yes! A 501(c)(3) nonprofit can award grants abroad, but it must follow IRS regulations to ensure the funds are used for charitable purposes.

What qualifies as a grant?

According to the IRS, grants include scholarships, fellowships, internships, prizes, awards, loans for charitable purposes, program related investments, and payments to exempt organizations to further the organization’s exempt purpose.

Nonprofits can award grants to individuals or to other organizations

To be exempt from taxation, the grant must adhere to the following guidelines:

Requirements for Individuals

To be exempt, the grant must be:

1. Awarded on an objective and nondiscriminatory basis
2. Follow a procedure approved by the IRS, and be:
   • A scholarship or fellowship used for study at an educational institution OR
   • Used to achieve a specific exempt objective OR
   • Used to improve the capacity, skill, or talent of the recipient

Requirements for Organizations

For an organization to be tax-exempt, a grant must be awarded to a public charity or the foundation must maintain expenditure responsibility. In addition to scholarships and fellowships, grants to organization can also be in the form of loans or program related investments.

Ensuring Compliance

Generally, the same use restrictions by the IRS for domestic grants are applied to grants awarded abroad. There are two main ways to make sure the organization & grant retain tax-exempt status.

1. Expenditure Responsibility – The nonprofit must track and document how the foreign grantee uses the funds to ensure they align with charitable purposes. This includes:
   • Conducting due diligence on the foreign organization. For example, the nonprofit should ensure that the grantee is not involved in any prohibited activities.
   • Signing a written grant agreement that specified the charitable purpose of the grant and its use.
   • Requiring periodic reports on fund usage to confirm the funds are used for their designated purpose.
2. Equivalency Determination – The nonprofit can confirm that the foreign organization is the equivalent of a U.S. 501(c)(3) organization. This involves:
   • Reviewing financials, governance, and purpose.
   • Obtaining an affidavit or legal opinion confirming equivalency.

Additionally, the nonprofit must report any foreign grants awarded annually on IRS Form 990.

Reporting on IRS Form 990:

• Report foreign grant activity on Schedule F of Form 990.
• Provide information about the grants, including the amount, region, and purpose.
• Disclose any grant agreements and monitoring activities.

Maintain Compliance and Documentation

Although there are some additional reporting requirements, U.S. nonprofits can award grants abroad. Maintaining reporting compliance, awarding grants for exempt purposes, and ensuring proper use of grant fundings is crucial.

Failing to follow these steps could risk the nonprofit’s tax-exempt status.

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