The Nonprofit Banker » Definition

Defining a Conduit Organization (a.k.a. Fiscal Agent or Intermediary)

Shuey Fogel — Tue, 18 Jan 2011 13:58:13 +0000

When grants or gifts cannot be made directly to a recipient (individual or organization) many times Fiscal Agents are used. These Intermediate charities are commonly referred to as Conduit Organizations because they are not the intended final recipient, rather just a pass-through.

With the right due diligence, control, and by-laws, this type of seemingly-indirect charity can be perfectly legal and advisable. (Please consult your lawyer to see if this solution is right for you or your organization.)

One such group that uses Conduits in this way are charities located outside of the United States (and, thus, not considered tax-exempt in the eyes of the IRS) that are looking to fundraise in America.

SOME GROUND-RULES

Let us be clear: This post is not looking to define the legal interpretation of a Conduit or Fiscal Agent. Nor is it seeking to extrapolate the ramifications vis-a-vis the IRS and related tax code. Rather, this post will seek to better understand the strategy and purpose behind these types of organizations.

This understanding is crucial in order to better address the more important question and the topic of my next post in this two-part series: How a Charity Can Choose the Right Conduit.

WHY WOULD A NONPROFIT NEED A CONDUIT?

Tax incentives are some of the most powerful marketing tools available to nonprofits trying to convince the average citizen to donate to the cause. In general, a private individual can receive money back (a % of charity given) on the income taxes that he or she has paid to the Federal Government; an arrangement that benefits both the donor and the charity. Granted the particulars are more complex than the simple formula I’ve presented, but the basic principles are true enough.

However, only donations to American organizations designated as 501(c)3 by the IRS are tax-deductible (see previous post summarizing What is an American Nonprofit).

This creates the obvious challenge to those registered outside the United States that would like to fundraise in America as donations given directly to these organizations are not tax-deductible.

Solution One: Establish an American nonprofit organization to support the cause abroad. These charities are commonly referred to as “Friends of” organizations. (See What is an American “Friends of” Organization? by Ellis Carter.)

Solution Two: Ask would-be supporters, instead, to send donations to a Conduit Organization registered in the United States, recommending that the funds be used for the charity registered abroad. The donation to the local Intermediary is tax-deductible, even though the final beneficiary isn’t a tax-exempt organization. So too, the foreign charity is, thus, not forced to set up an American 501(c)3 tax-exempt charity and is able to avoid the corresponding fiscal and regulatory headache.

Keep in mind, that not every organization can act as a Fiscal Agent and that these Conduits must have (among other things):

Written in their by-laws the ability to forward monies to other nonprofit organizations that promote similar goals.
Retain control of the donation, reserving the right to reject the donor’s wishes, should it deem necessary.

(Again, as these issues are very tricky, an organization’s lawyer and Board of Director should be consulted before deciding to act as or use a Conduit.)

While the first solution allows for greater independence and control by the foreign nonprofit, the first solution also necessitates the axiom made famous by Spiderman: With Great Power Comes Great Responsibility. The second solution, in contrast, uses a preexisting Fiscal Agent and circumvents all of this hassle. Or to paraphrase the above truism: With No USA Registered Charity Comes Much Less Responsibility. (See also 4 Reasons Why Not to Establish an American Friends Organization.)

CLOSING NOTES

The name Conduit can have negative connotations as it implies lack of control or subterfuge. This, of course, doesn’t have to be the case and these types of charities can have the full blessing of the IRS. (See International Giving by Public Charities by Guidestar for additional tips.)

Additionally, while Conduit Organizations contain certain similarities to Donor Advised Funds and Fiscal Sponsorship, the three are each unique and different tools; i.e. this post does not address Donor Advised Funds nor Fiscal Sponsorship.

(See Time to Convert for an interesting take on DAF’s by the Wall Street Journal and Fiscal Sponsorship is Maturing as Field on the NonprofitLawBlog for more information on FS’s .)

Next Post: 6 Questions to Help Choose the Right Conduit Organization

Tizku Lemitzvot,

Shuey

Disclaimer: This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Defining an Amutah [Israeli Charity]

NonProfitBanker — Wed, 22 Dec 2010 16:16:19 +0000

The Hebrew word amutah, referring to a charity in Israel, is used both correctly and incorrectly to describe just about any nonprofit organization registered in the country. But wait, it get’s more confusing. Not all charities are charities, sometimes they’re companies. And sometimes a charity isn’t tax-exempt while a company might be.

Perplexed? Don’t worry. In this post I’ll cover the various terms and statuses available to Israeli charities — along with links to government websites — that will help you find the answer to the bottom-line question burning in your mind: Is this organization worthy of my donation?

A UNITED STATES “NONPROFIT”

Like many things, sometimes the easiest way to explain something is to first define what it is not; thus, a look at our brothers and sisters across the ocean in the United States.

Simpy put, in the United States, all for-profit and nonprofit organizations are corporations. Each company is registered in the state where it is headquartered; the definition and governance of these companies differs slightly from state to state.

In the United States the label of “nonprofit” is granted by the Federal Government, specifically by the I.R.S., and is only a tax designation; referring to any organization that is exempt from some federal income taxes (although many states use the federal guidelines to exempt similar organization from state taxes, as well). All organizations that fall into this category are labeled as 501(c). While there exist 28 categories, only those organizations belonging to the 501(c)3 category will allow an individual’s donation to be tax-exempt. This group is divided into public charities and private foundations. For the purpose of this article, the definitions of the two groups are not relevant. In short, it is these 501(c)3 organizations that have been colloquially dubbed “nonprofits” in the United States.

To summarize: a charity in America is a Federal label pertaining strictly to tax status.

WHAT IS AN “AMUTAH“?

In Israel, traditional nonprofits are called amutot (or amutah in singular) and have their own governmental oversight body, called the Rasham Ha’amutot (Registrar of Charities). Companies have a separate governmental body tasked with overseeing them called the Rasham Hachavarot (Registrar of Companies). Both registrars can contain organizations that would be considered non-profit and for-profit under American standards.

To summarize: the simple word charity, isn’t a tax label, but rather only a function of the particular Governmental Body in which a nonprofit organization is registered. In our case, Rasham Ha’amutot (Registrar of Charities).

THE 5 CERTIFICATIONS AVAILABLE TO ISRAELI CHARITIES

Further investigation reveals that within each registrar are subcategories that will be referred to as licenses or statuses for the purpose of this article. Again, as most nonprofits are registered with the Rasham Ha’amutot (Registrar of Charities), this article will only analyze these types of organizations.

Mispar Ha’amutah [Nonprofit Organization Number] – This is simply a number that the charity receives letting the public know that this organizations is registered with the government under the Registrar of Charities; as such, this charity is subject to government scrutiny under the Amutah (Nonprofit) Law. This number will function like an I.D. number (for Israelis) or like a social security number (for Americans). This number is for identification purposes only and does not label donations the charity receives as tax-exempt. The process for receiving a nonprofit ID number takes approximately a month, according to the staff at the Registrar of Charities.
Nihul Takin [Sound Management] – This is a certificate awarded to organizations that follow an additional set of management guidelines as decreed by the Registrar of Nonprofits. This status is assigned to organizations that have been in activity for no less than two years. For the first two years, there is an interim document that can be obtained called “Certification of Validity of Presentation of Documents.” An organization will not be able to obtain grants or contracts from the government without the nihul takin status. For better of for worse, many institutions outside Israel are using the nihul takin as their benchmark, as well.
Mosad Tziburi [Public Institution] – This status is given by the Ministry of Finance and declares the organization’s funds are to be tax exempt; for example, profit earned from investments made with a bank or financial institution would be tax exempt for this kind of organization. This status does not brand the donations that the charity receives as tax deductable. A nihul takin license is required when applying to be a “public institution.”
Se’if 46 [Paragraph 46] – This status is granted by the Finance Committee of the Knesset on the recommendation of the Finance Committee to organizations that have obtained status as a public institution. It is the “Paragraph 46” status that is comparable to the nonprofit 501(c)3 status in the United States. Individuals that donate to charities that have Paragraph 46 status can get up to a 35% refund on their taxes. An expert accountant in the field estimated the minimum time required to receive Paragraph 46 status as six months. Practically speaking, this means that two and a half years of existence is the absolute earliest an Israeli nonprofit can expect money donated to them to be tax-exempt. It is important to note that only approximately a third of the charities operating in Israel have this status.
Malkar [Institute Not-Intended for Profit] – This license is granted from the Ministry of Finance and can be interpreted as “additional level of fiscal approval.”[1] Organizations with this status can sell goods and services without charging VAT [Value Added Tax], or sales tax. Purchases made by the charity, however, are still subject to VAT.

CHARITIES AS COMPANIES

A small number of nonprofit organizations exist as a Chevrah Leto’elet Hatzibor [Public Benefit Company]. These organizations are governed by company laws and are registered with the Rasham Hachavarot [Registrar of Companies]. These institutions can also apply for all of the above licenses, if they are founded “for the promotion of commerce, arts, science, religion, charity, or any other social function with the aim of benefiting the public.”[2]

(For a more detailed explanation of a Public Benefit Charity, please see this previous post.)

WHAT CERTIFIES A NONPROFIT AS KOSHER?

This is where things get a tad fuzzy.

While the Amutah (Nonprofit) Law established by the Knesset is quite clear and concise, the guidelines managing nonprofits in Israel are murky, cumbersome, and confusing; this is due to the Israeli Government having created additional licenses and leaving them in the control of different branches of the government — Knesset, Ministry of Justice and Ministry of Finance.

Those individuals or institutions looking to make a comparison between organizations registered in the United States and Israel will, thus, find their compass missing its needle. The simple charity ID number does not tell a donor or oversight committee anything about the organization. The additional steps of obtaining public charity, tax-exempt, or malkar status are less an evaluation of the management of the amutah and more analysis if the organization is not-for-profit — not the same thing, at all. And even this is only according to the guidelines set by the Israeli Government.

This leaves the general public with only the nihul takin (albeit its own deficiencies and stringencies) as the only judge of an organization’s charitable nature — assuming the organization has even bothered to apply for it.

Not a perfect solution. But the best the Israeli public has for the time being.

If you’re already on the net, here are some sites to check out an Israeli nonprofit organization:

Rasham Ha’amutot [Registrar of Charities] (Hebrew) - Basic information about Israel’s charitable organizations registered with the Registrar of Charities.

Rasham Hachavarot [Registrar of Companies] (Hebrew) - Basic information about Israel’s companies (including PBCs) registered with the Registrar of Companies.

Guidestar Israel (Hebrew and English) - FOR CHECKING AMUTOT ONLY. The site has yet to incorporate those organizations registered with the Registrar of Companies as PBCs. Here you can find scanned financial statements and other basic information about Israel’s charities.

Mas Hachnasah [Tax Authority] – Tax Exempt Status, Donations (Paragraph 46a Status) - Ability to check if an amutah or chalatz has tax-exempt status.

Tizku Lemitzvot,

Shuey

Disclaimer: This document is intended to summarize and provide basic information only and should not to be considered advice. This blog houses my personal opinions. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

_______________________________________________________________________________

Works Cited

[1] Eliezer David Jaffe “The State, Volunteers and Nonprofit Organizations in Israel: the Nature of the Relationship” (Giving Wisely, The Internet Directory of Israeli Nonprofit
and Philanthropic Organizations), http://www.givingwisely.org.il/npo/State.htm

[2] Ibid

Bibliography

To supplement my own knowledge and experience, I drew upon the following resources:

“501(c)” (Wikipedia, The Free Encyclopedia),http://en.wikipedia.org/wiki/501(c)

“Application to be Recognized as a Public Institution” (Israeli Tax Authority),http://www.finance.gov.il/taxes/docs/malkar_2006-09-20.pdf

“Presentation of Documents to Obtain Certification of Sound Management for 2010” (Israeli Ministry of Justice)http://www.justice.gov.il/NR/rdonlyres/EB554008-BB8D-4C9C-A040-D02FB3BFDEFC/0/nihultakinamutot2011.pdf

“The State, Volunteers and Nonprofit Organizations in Israel: the Nature of the Relationship” Eliezer David Jaffe, (Giving Wisely, The Internet Directory of Israeli Nonprofit and Philanthropic Organizations), http://www.givingwisely.org.il/npo/State.htm

Translations of Hebrew words to English were done through Morfix @ http://morfix.mako.co.il/

Defining a Chevrah LeTo’elet Hatzibur [Public Benefit Company]

NonProfitBanker — Mon, 20 Sep 2010 13:21:21 +0000

“What do you mean that Israeli charities can be registered as companies?”

That was the question someone asked me last year that that had me thinking to myself, yet again, that Israeli charity legal/tax structure is a language onto itself and should require its own Ulpan.

Towards this end, I hope to clarify in this post the somewhat contradictory concept of a Chevrah LeTo’elet Hatzibur [Public Benefit Company].

TERMS

A charitable organization has a choice of registering in one of two ways: (1) with the Rasham Ha’amutot [Registar of Charities] as a amutah [charity] or (2) with the Rasham HaChavarot [Registrar of Companies] as a Chevrah LeTo’elet Hatzibur [Public Benefit Company].

In Hebrew, the Chevrah LeTo’elet Hatzibur [חברה לתועלת הציבור] is more commonly called by its acronym, Chalatz [חל"צ].

REGISTRATION & DOCUMENTATION

As the name implies, a Chalatz [Public Benefit Company] is formed as a company, complete with definitive shares and rights of ownership. This is one of the reasons why a nonprofit might choose to register as a Chalatz, as opposed to a charity (the exact pros and cons are beyond the scope of this piece).

Once registered as such, this company must adhere to the same standards, protocols, and certifications if it wishes to be recognized as a nonprofit organization. This means, that a Chalatz must apply to the Registar of Charities for Nihul Takin [Certificate of Proper Management] to receive government grants and obtain a Se’if Arba’im VeSheish [Paragraph 46a] from Mas Hachnasah [Tax Authority] to be considered tax-exempt.

Because it is registered with the Rasham Hachavarot [Companies], a Chalatz will have a different registration prefix than an amutah. The registration number for amutot, registered with Rasham Ha’Amutot [Charities], begins with a “58.” In contrast, a Chalatz will start with a “51.”

Additionally, the names of these corporations in English will generally end with (or contain in parenthesis) the acronyms of PBC (Public Benefit Company) or CC (Charity Corporation).

UNITED STATES COMPARISON

For those readers familiar with United States law, the best comparison to a Chalatz is the newly established L3C type company:

“The L3C’s primary purpose is to conduct activities that further a charitable or educational purpose. Earning a profit is its secondary purpose…the L3C statutes require the managers to pursue the accomplishment of a charitable or educational purpose. They can earn a profit while pursuing their mission, but earning a profit can’t be a significant purpose.” – CharityLawyerBlog

However, while L3C is not eligible for tax-deductible gifts, a Chalatz certainly can be.

STATUS CHECK

Again, it is important to stress that a charitable organization designated as an amutah or a Chalatz does not automatically qualify for tax-exempt status.

With that said, there is a way to check if a company is at least defined as a Chalatz…as long as you understand one basic concept: The databases for amutot and PBCs are separate. Thus, any person doing research must first know with which government body – Rasham Ha’amutot [Charity] or Rasham Hachavarot [Company] – the organization is registered.

Assuming that the said organization is registered as a company, basic information can be found at the Ministry of Justice site for the Registrar of Companies: http://ow.ly/2GAk7. Information can be found through either the company’s name in Hebrew or its mispar chevrah [company number].

When found, after the company’s name in Hebrew will be the acronym חל”צ, generally in parentheses.
When clicking on the company’s number, the reader will be taken to another page that provides additional details of the company. The lowest row of the table lists תיאור החברה [Company Description]. The description will start with the words: מטרות ציבוריות בלבד [Public Purposes Only] and will then be followed by the now familiar phraseחברה לתועלת הציבור [Public Benefit Company].

While any of these two pieces designates a charitable company, having both there will seal the deal. Item #2 is copied from the description that the company submits to the Registrar of Companies upon opening and is both helpful and telling.

If you’re already on the net, here are some other good links to try:

Rasham Ha’amutot [Registrar of Charities] (Hebrew) - Basic information about Israel’s charitable organizations registered with the Registrar of Charities.

Rasham Hachavarot [Registrar of Companies] (Hebrew) - Basic information about Israel’s companies (including PBCs) registered with the Registrar of Companies.

Guidestar Israel (Hebrew and English) – FOR CHECKING AMUTOT ONLY. The site has yet to incorporate those organizations registered with the Registrar of Companies as PBCs. Here you can find scanned financial statements and other basic information about Israel’s charities.

Mas Hachnasah [Tax Authority] – Tax Exempt Status, Donations (Paragraph 46a Status) – Ability to check if an amutah or chalatz has tax-exempt status.

Tizku Lemitzvot,

Shuey

Disclaimer: This document is intended to summarize and provide basic information and should not to be considered advice. This document should not replace nor supplant recommendations by licensed professionals; such as accountants and/or lawyers. Additionally, this summary might not reflect updates to the Ministry of Justice and/or associated internet sites.