I was dismayed when I heard that some American (and European) Foundations are requiring amutot [Israeli nonprofit organizations] to have the Se’if [Paragraph] 46a status, which declares donations to a charity to be tax-deductible.

This latest phenomenon demonstrates a lack of understanding of the intricacies of international nonprofit regulations and makes it harder for worthy Israeli charities to raise money abroad. 

WHY DEMAND THE EXTRA LEVEL OF TAX-DEDUCTIBLE (SE’IF 46) STATUS?

Simply put, people are scared.  As a result, Foundations, in particular, are subjecting their recipients to increasing levels of scrutiny; in this case, requiring Se’if 46 to provide an additional measure of protection.

An “additional measure” because Israeli nonprofits are assumed to have already received the Nihul Takin [Certificate of Proper Management] from Israel’s Rasham Ha’amutot [Registrar of Charities].

At the outset, this seems like a reasonable request.  After all, in the United States a charity or nonprofit organization is one which is categorized as 501(c)3, which declares donations to this charity to be tax-deductible.

THE DEMAND OF “PARAGRAPH  46″ ISN’T FAIR

In Israel, three different government bodies oversee charities: the Knesset, Rasham Ha’amutot [Registrar of Charities], and Mas Hachnasah [Tax Authority].  Each evaluates Israeli charities with its own particular set of lenses and priorities.

Stage 1

The Knesset, Israel’s Parliament, defines the context and framework of an Israeli charitable organization through Chok Ha’amutot [Law of Charities].   Charitable, effective, or well-governed are of no importance at this first and most basic stage.

Stage 2

The Rasham Ha’amutot, or Registrar of Charities, is the executor of the Law of Charities, reviewing the applications of charities and assigning them their amutah [charity] number.  More importantly for evaluation purposes, the Rasham oversees the Nihul Takin [Certificate of Proper Management]. This status is granted to those organizations, for lack of better word, which are governed well. The 45 page guideline detail such things as: how to transfer money, minimum number of signatories, proper way to reimburse board members, and other things (like I said, it’s 45 pages).

(It is this document, I feel, which lacking anything better, is the best test to judge if a charity is worthy).

Stage 3

The last, and certainly not least, is the Se’if 46 that is granted through both Mas Hachnasah [Tax Authority] and a Knesset sub-committee. The Tax Authority checks if the charity is financially sound (pay close attention, I didn’t say charitable) and recommends the organization for Se’if 46 — but it is the Knesset sub-committee that has the final say and  actually approves the granting of this much-coveted tax-deductible status.

This last stage poses a number of tough questions that are the roots of the incongruities between 501(c)3 and Se’if 46:

The Tax Authority — through a serious of predetermined ratios, number games, and fiduciary rules — determines if an organization is for the public good.  Isn’t this the Registrar’s job? Isn’t the Nihul Takin already tasked with determining if an organization is charitable and run well?

Furthermore, why is a Knesset sub-committee part of the process? What sort of expertise is wielded by this group of lawmakers that is somehow lacking from both the Registrar of Charities and the Tax Authority?

The message implied is that the decision to grant tax-deductible status is as much a political decision as it is a meritorious one.  (And I know of at least one organization that was approved by Mas Hachanasah but rejected by the Knesset panel.)

ADDITIONALLY, IT’S A TIME ISSUE

Much like in the States, in Israel tax-deductible status isn’t issued immediately.  More specifically, it takes a minimum of approximately two years to receive Se’if 46 (for a variety of reasons).  This means that many worthy charities can exist in their early years without the possibility — through no fault of their own — of achieving tax-deductible status.  Effectively, holding a charity’s age against them.

And yes, the process takes less time in the United States.

THE DIFFERENCE BETWEEN 501(c)3 AND SE’IF 46

Contrary to Israel, the United States has a much more simple approach to what is considered tax-deductble, focused around two ideas:

1. Cannot be organized or operated for private benefit
2. Must be serving some public good (a.k.a. charitable), or what the IRS refers to as exempt purposes.

This is in contrast to Israel, which will first inspect (for better and for worse) a nonprofit’s management & organizational composition (Nihul Takin) and then it’s financial structure (Se’if 46) in order to grant tax-deductible status.

While not declaring one set of regulations to be better than the other, it can still be said that comparing the two is nothing short of comparing apples to oranges.

So it all comes down to this:

American Foundations do not have to play by Israeli rules, so why voluntarily choose to do so?

Have you experienced increased scrutiny? Has your experience been positive or negative?  I’d love to hear them in the comments.

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 and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Additional information on the structure of Israeli charities can be found in a previous post, Defining an Amutah [Israel Charity].

Photo Credit: “Money and Magnifying Glass” by Images_of_Money

ADDENDUM:  WHAT SHOULD AN ISRAELI CHARITY DO IF THEY ARE LACKING SE’IF 46?

I hope this post serves as the basis for an explanation to American Foundations why an Israeli nonprofit might lack Se’if 46.  Armed with the new-found understanding, hopefully the Foundation will process the request and forward the grant as promised.

However, it is also quite possible that if a particular Foundation already believes that the requirements for tax-deductible status in the two countries — 501(c)3 and Se’if 46 — are similar, then it is predisposed to a negative answer.

If this is the case, it might be best to immediately re-apply, using a Conduit with a Se’if 46 instead.  Obviously, both the Conduit and the Foundation would have to be open to this idea.  The colleague who suggested this idea was in the process of having his organization do exactly this.

While there will be a delay as the application will have to be re-processed, he explained that this was the only way to bypass the American Foundation’s insistence and suspicion regarding the lack of tax-deductible status — getting money late is better than not getting money at all.

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.

“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].

1. When found, after the company’s name in Hebrew will be the acronym חל”צ, generally in parentheses.
2. 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.

Obtaining government funding seems to be every nonprofit’s goal, at least in Israel. I have heard countless lecturers, founders, and foundation representatives preach the Darwinian virtues of incorporating government grants into an Israeli charity’s fundraising strategy; after all, the nonprofit is servicing the Israeli public. It is to the Government’s benefit – if not its outright duty – to ensure that this charity’s program continues to exist

Not bad on paper. In practice, however, these Israeli government grants can sometimes be more trouble than they are worth.

For the purpose of this post, as a banker I would like to restrict my focus on the budgetary challenges associated with these grants.  Specifically, the two disadvantages that arise because grant monies are dispersed only after expenses are incurred.

1. Cash Flow Problems

Simply put, grants can be released before expenses have been incurred or after expenses have been incurred. Unfortunately for recipients of Israeli government grants, the Government releases grants anywhere from three to nine months after a project has been started (and as long as the appropriate paperwork has been filled out). Many times, the needed funds arrive after the organization has already started to dip into its own cash reserves.

As you can imagine, this can have a negative impact on an organization’s cash flow.

While sometimes nonprofits can float expenses and re-prioritize suppliers, many expenditures, like salaries for example, must be paid immediately. In other words, nonprofit organizations are forced to spend money that they do not have.

These charities are then forced to turn to donors, banks, foundations or suppliers to help them during these tough times, exhausting tremendous resources and favors in the process.

This is, of course, assuming that the organization can find this help.

2. Increased Cost

If the charity is successful in procuring either a line of credit or a bridge loan, increased fees are sure to follow. And the fees are not negligible – even with benefits and discounts. Generally, they include a processing fee and interest fees; additional costs that could have been avoided if the grant had arrived before the program started and not after.

Thus, not only is the Israeli government causing organization’s to waste resources, it is causing these charities to waste hard-earn money, as well.

And the more you receive from the Government, the more credit is needed.

Two Short Examples

Example #1: A nonprofit I was speaking to has a 500,000 NIS budget, totally provided through a government contract. The CEO told me that he occasionally requires a 65,000 NIS line of credit to float him until his next grant payment from the Israeli government. The line of credit stands at 13% of the yearly budget, a percentage that does not sit well with banks and is hard to explain to potential donors. To secure the line of credit, the CEO has put his personal account/money as collateral.

Example #2: Another nonprofit I met with will soon be signing a contract with the government that will increase their yearly operating budget from 10 million NIS to 15 million NIS. In order to absorb the government grants into its cash flow and fundraising strategy, the organization is looking to increase its standing credit at the banks from 300 thousand NIS to 500 or 600 thousand NIS. Assuming the organization can procure a credit line of this size, it can easily cost it upwards 8,000 NIS a year, even as much as 20,000 NIS. .

Conclusion

As mentioned at the beginning of the post, there are other factors to consider that I am not addressing.

From a budgeting perspective, these two consequences raise red-flags and serious doubts about the overall benefits of grants from the Israeli government.

With that said, government aid can be an important part of an organization’s fundraising strategy – particularly for those organizations that have the cash reserves to weather the money’s inherent delayed arrival.

Tizku Lemitzvot,

Shuey

Know of any stories that prove or disprove? We could all benefit from hearing them.

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.