What Nonprofits Should Consider Before Expanding Abroad

Your U.S. nonprofit organization has just received a grant to implement a program in another country. The program advances your mission and aligns directly with your organization’s expertise. As you begin arranging to hire local staff or open a bank account, you discover that you may need to register a legal presence in the country.

Registration triggers a set of tax, employment, compliance, data privacy, and risk management obligations that can extend well beyond the initial grant or program budget. However, it is not always required, and where it is, more than one operating structure is usually available. Once registered, the organization will have a legal presence in place, requiring management of related costs, risks and oversight responsibilities that come with operating in another country.

This post provides an overview of the legal issues that most frequently require attention before expanding to a new country.

Your Activities May Trigger a Registration Requirement

The analysis starts with clearly defining what the organization plans to do in the country, and whether that scope of proposed activities triggers a requirement to register an in-country presence. Relevant considerations may include:

• Whether staff or representatives perform work on a recurring basis
• Whether the organization signs contracts or leases locally
• Whether the country requires specific permission or sponsorship from a ministry or government agency
• Whether the organization holds itself out publicly as operating there

If registration is required, the next question is which structure best fits the organization’s needs. Most countries provide several vehicles, such as opening an in-country branch or representative office, incorporating a separate nonprofit, or, in some cases, a for-profit entity.

Each structure carries its own registration, tax, governance, and compliance profile. The right choice generally turns on the nature and duration of the planned activities, the degree of control the U.S. nonprofit requires, and the regulatory environment in the target country.

Registration requirements vary considerably by country and can be difficult to identify and interpret. The Council on Foundations’ Country Notes and the International Center for Not-for-Profit Law’s Civic Freedom Monitor are useful starting points, though neither is a substitute for local counsel.

Your Funds May Require Greater Oversight

Many countries provide the option of establishing either a branch or a separate legal entity.

A branch is generally part of the U.S. organization rather than a separate legal person, though registering one still triggers most of the tax, employment, and other compliance obligations described below. A separately incorporated entity, by contrast, is a distinct legal person under local law.

Unless the U.S. organization has direct governance control of that entity, through an agreement, board seats, or a similar arrangement, it generally needs to treat funds sent to the entity as it would treat a grant to an unrelated foreign charity:

• Reviewing and approving each use of funds in advance
• Retaining the ability to withhold or redirect funding
• Documenting how the money was used

Without direct control or documented discretion and control over the funds, the IRS may treat the U.S. organization as a mere conduit for the foreign organization, which can raise questions about the deductibility of contributions and, in some cases, the organization’s own tax-exempt status. It is important to select the appropriate structure with these considerations in mind.

Your U.S. Tax Exemption Doesn’t Travel

• Your mission may not qualify as charitable or tax-exempt. Many countries limit charitable and tax-exempt activities to only a few specific purposes such as direct relief for vulnerable populations. Even if your organization is tax-exempt in the U.S., your activities may be subject to value-added tax, income tax, or other local levies. Some international activity can also trigger U.S. tax consequences, including unrelated business income tax.
• Reporting obligations multiply. International operations may also create additional U.S. and local financial reporting obligations, including informational returns, books-and-records requirements, audit obligations, and jurisdiction-specific filings.
• Money may not move freely. Some countries impose foreign exchange controls that require government approval for transfers above a certain amount, cap how much local currency can be converted, or mandate that funds received from abroad be deposited with or converted through a specific local bank. These restrictions can affect both incoming funds and the ability to move funds out of the country if they need to be returned or reallocated. The rules vary considerably by country and can catch U.S.-based finance teams off guard since U.S. wire transfers are largely unrestricted by comparison.

U.S. Anti-Corruption and Sanctions Laws Follow You Abroad

• The Foreign Corrupt Practices Act (FCPA) prohibits offering, paying, promising, or authorizing the payment of money or anything of value to a foreign government official to assist in obtaining or retaining business or securing an improper advantage. Exposure can arise from payments made by an organization’s own officers, directors or employees, as well as from improper payments made through third parties or intermediaries.
• The Office of Foreign Assets Control (OFAC) administers sanctions programs that may prohibit certain transactions with sanctioned countries and designated persons who may be potential partners, vendors or personnel.
• Build compliance into program design. Screening and compliance procedures are best built into the program’s design from the outset, including internal policies, training, and approval processes for engaging local partners, vendors, and intermediaries. Noncompliance can result in criminal penalties, civil fines, and asset freezes.

At-Will Employment Is Largely a U.S. Concept

• Employment at-will is uncommon outside the U.S. Many jurisdictions require a written employment contract, mandate specific employee benefits, and impose statutory notice periods or severance obligations that can make termination significantly more expensive and more procedurally constrained than under U.S. laws. These requirements can affect how quickly and affordably the organization can hire local staff, and how easily it can end employment relationships.
• For shorter term engagements, evaluate alternatives to direct employment. A professional employer organization or an in-country partnership can potentially remove the need for the U.S. nonprofit to employ anyone locally. Where direct employment is necessary, local employment law governs.
• Sending U.S.-based or other non-national staff to the country may raise other issues, such as visa requirements, adequate insurance coverage, and global mobility issues.

Your U.S. Data Practices May Not Be Enough

• Collecting information about program participants, employees or other individuals in another country may create obligations governing how personal information is collected, used, transferred, and stored. Standard U.S. practices may not satisfy local privacy requirements. The EU’s GDPR is the best-known example of a comprehensive privacy law, but an increasing number of countries have enacted their own robust data protection laws.
• Address privacy requirements during program design, before data collection begins, and work with an experienced local data privacy professional if personal information will be collected, used, stored, or transferred across borders.

Your IP Rights Don’t Cross Borders Automatically

• U.S. intellectual property structures may not apply. The work-made-for-hire doctrine that typically gives U.S. employers ownership of employee-created works does not apply automatically abroad. Without a written agreement that complies with local law, an organization may find that its IP rights are not enforceable in the host country.
• The same principle applies to names and logos. Holding U.S. trademark rights does not automatically protect a brand outside the U.S., and additional filings or local approvals may be required to register your trademark in the host country. Organizations may want to determine whether their trademarks are available in the target country and register them before or alongside the start of operations. The Madrid Protocol can simplify this process by allowing registration in multiple countries through a single application, but it does not make protection automatic.

U.S. Insurance Policies May Leave Gaps Abroad

• Existing U.S. insurance policies are generally written for U.S. operations and often exclude activities, personnel, and property located abroad.
• Review existing policies to determine whether additional coverage, local policies, or other risk-management measures may be appropriate. Organizations operating in higher-risk or politically volatile regions may also want to consider additional coverage not typically carried domestically, such as kidnap and ransom, political violence, or medical evacuation coverage.

Plan the Exit Before You Enter

One planning step deserves particular attention: determining how the organization will unwind its presence if the program ends, funding is discontinued, or the partnership does not work out.

An organization that has not considered how it would leave a new geography has likely not finished planning its expansion.

Key Questions to Address at the Outset

Before committing to operate in a new country, it may be helpful to answer the following key questions:

• What activities will we conduct, and do they require registration or other approvals?
• What operating structure best fits the program’s duration, funding, and governance needs?
• What tax, employment, fund-transfer, sanctions, privacy, and insurance obligations will the structure create?
• Who has authority to approve entry into the country, and what information must be considered before that approval?
• Have we budgeted for local counsel, compliance, insurance, and the staff time required to manage the operation?
• How will new operations be integrated into the organization’s existing compliance program and enterprise risk management framework, including screening, partner due diligence, training, reporting, and violation-response procedures?
• How would we wind down the operation if circumstances change?

The answers will depend on the country, the program, and the organization’s circumstances. Working through them at the outset can help ensure the decision to expand reflects the full legal, financial and operational commitment involved rather than surfacing it once operations are already underway. If your organization is considering operating in a new country, or is already doing so and would like to assess its current structure, please contact Semira Asfaha at sasfaha@outsidegc.happy-staging.com.

Semira Asfaha is a Partner at OGC with substantial experience advising clients on cross-border operations, governance and compliance, commercial transactions, and the employment questions that follow an organization into a new country.