Preliminary Considerations for a Nonprofit’s Potential Activities Abroad

Organizational Options for Specific/Isolated Event / Advantages / Disadvantages
Host event without contracting or partnering with a local entity:
  • Greatest level of control on activities, but greater risk.
  • No licensing or registration requirement to be fulfilled in the target nation in order to organize and host the event.
  • Greatest level of involvement and risk.
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  • Using U.S.-based personnel will likely avoid hiring and employment law considerations in the target nation.
  • Eliminates certain due diligence and contractual concerns by avoiding partnership with another entity.
  • Maximum administrative flexibility and ease of commencing planning activities
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  • No local business partner to provide guidance or serve as in-country representation.
  • No means of insulation from liability, or sharing of risk.
  • Potential legal risks and requirements to engage in business activities, particularly if revenue producing
  • Potential tax consequences if determined to be “doing business” locally
  • Both the nonprofit and its employees working in the target nation must comply with visa requirements, U.S. and target nation tax codes, and U.S. export control regulations.

Contract with an nonprofit management company (sometimes called “trade fair organizer”):
  • Less control over logistical aspects of “trade fair” or event, but less risk. Generally maintaining control regarding substantive matters.
  • The nonprofit would hire an in-country nonprofit management company to act as a “local office” for the nonprofit for a particular event.
  • Typically recommended if the nonprofit has no immediate need or desire for its own physical presence in the target nation.
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  • Generally, lower level of involvement and risk
  • Means of introduction into a particular geographic area, in order to assess business feasibility.
  • Provides temporary in-country presence without U.S.nonprofit permanent establishment for tax, liability and employment purposes.
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  • Careful due diligence of management company critical.
  • Requires tight contractual provisions to terminate for non-performance.
  • Need to ensure that no “permanent establishment” is developed.

Organizational Options for Ongoing Presence / Advantages / Disadvantages
Contract or Form “Affiliation” with a similarly situated nonprofit (i.e., local entity):
  • Control maintained pursuant to contract terms and conditions, but more risk of exposure wherepotentially “doing business” in target nation
  • Nonprofit would enter into contract with similarly situated nonprofit in target nation to form a foreign “affiliation” or “charter” relationship. No third (“new”) entity formed, as in joint venture option below.
  • Typically recommended if the nonprofit has no immediate need or desire for its own physical presence in the target nation, but may want to expand legal/ physical presence in target nation in the future.
  • Also recommended if the nonprofit desires option of a physical presence in the target nation but does not wish to hire its own employees.
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  • Provides in-country representation without U.S.nonprofit permanent establishment for tax, liability and employment purposes.
  • Contractual arrangement provides vehicle to protect and restrict specific rights of nonprofit under the terms of the contract, e.g., Intellectual Property rights, such as the usage of name and logo; conduct of events; membership criteria, etc.
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  • Careful due diligence of representative nonprofit critical.
  • Requires tight contractual provisions to clearly terms and conditions, delineate relationship and terminate for non-performance.
  • Need to ensure that no “permanent establishment” is developed.

Form Joint Venture with a similarly situated nonprofit in target country:
  • Third “joint” entity formed as between nonprofit and similarly situated foreign nonprofit in target nation.
  • Requires compliance with local laws regarding establishing a venture with a foreign entity.
  • Greater control on activities, but greater risk.
  • Generally, moderate level of involvement and risk.
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  • More control and oversight of activities in country.
  • Sharing of costs and improved access to nonprofit members in the local market.
  • May seek to better manage liability by establishing a separate entity that becomes the venture partner.
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  • Typically results in the U.S.nonprofit “doing business” in the country for tax and liability purposes.
  • Tax and liability issues likely triggered with such “in country” presence.
  • Due diligence of potential partners critical.
  • Requires tight contractual provisions to clearly delineate relationship and termination for non-performance.

Contract with an nonprofit management company to act as “local office” of U.S.nonprofit:
  • The nonprofit would hire an in-country nonprofit management company to act as a “local office” for the nonprofit.
  • Control maintained pursuant to contract terms and conditions, but more risk of exposure where potentially “doing business” in target nation
  • Recommended if the nonprofit desires option of a physical presence in the target nation but does not wish to hire its own employees.
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  • May potentially provide in-country presence without U.S.nonprofit“permanent establishment” for tax, liability and employment purposes.
  • Means of introduction into a particular geographic area, in order to assess business feasibility.
  • Generally, lower level of involvement and risk.
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  • Careful due diligence of management company critical.
  • Requires tight contractual provisions to terminate for non-performance.
  • Need to ensure that no “permanent establishment” is developed.

Establish an in-country branch of U.S.nonprofit:
  • U.S.nonprofit would directly establish and operate a local office in the host county, using employees of the U.S.nonprofit and directly entering into contracts with outside vendors.
  • Requires compliance with local laws.
  • Generally, highest level of involvement and risk.
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  • Provides in-country presence with greatest level of control (but generally highest risk).
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  • Likely constitutes “permanent establishment” subject to full in-country tax, employment and liability responsibility.
  • May also subject U.S.nonprofit to tax or other legal liability in the host country; lawsuit against a branch may give rise to jurisdiction over the U.S.-based nonprofit in the courts of the host country.
  • Hiring local employees needed, thus subject to local employment and benefit laws.
  • Greatest level of risk; exposes assets of U.S.nonprofit to liabilities in the other country.

Establish atax-exempt, nonprofit subsidiary entityunder local law:
  • Requires compliance with local laws regarding establishment of a tax-exempt, nonprofit nonprofit under the local laws.
  • Greater control on activities, but greater risk.
  • Generally, high level of involvement and risk.
  • Recommend use of an “nonprofit management company” (as described above) to assist in formation of new nonprofit nonprofit in target nation.
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  • Local tax-exempt, nonprofit nonprofit may qualify for tax-exempt status.
  • Greatest level of control.
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  • Full in-country tax, employment and liability responsibility.
  • Hiring local employees needed, thus subject to local employment and benefit laws.
  • High level of risk; but separately incorporated subsidiary mayhelp avoid legal jurisdiction over U.S.-based parent nonprofit in the local country.

Tax and Accounting Issues / Advantages / “Disadvantages”
  • Does U.S. have a tax treaty with the target country?
  • IRS rules that apply to U.S. tax-exempt, nonprofit nonprofits will apply similarly to the nonprofit's international activities.
  • Conduct by tax-exempt, nonprofit nonprofits that would be restricted in a domestic setting will be restricted internationally as well. For example, unrelated business income will remain subject to U.S. taxation.
  • Most countries will require revenue generated in that nation to be reported for taxation and other purposes.
  • If a tax-exempt, nonprofit nonprofit is created under the law of the target nation, there may be withholding taxes imposed by the target nation on transfers or payments from the local nonprofit to the parent nonprofit, such as withholding of royalties, interest, etc.
  • Some countries may impose restrictions on outflows of currency across their borders (e.g., certain East Asian countries). These countries may require licenses for such transfers, or they may prohibit transfers of hard currency entirely.
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  • Determine if a tax treaty in place with target country to minimize or permissibly avoid double taxation.
  • Some countries have formal statutes providing for income tax exemptions for tax-exempt, nonprofit nonprofits, however, not all do. Countries without such statutes may leave tax policy determinations to the discretion of government officials.
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  • IRS rules apply to nonprofit’s international activities.
  • Unrelated business income remains subject to US taxation.
  • Typically, tax-exempt activities must be executed with caution. For example, expenses for travel that could be considered extravagant or excessive may be challenged as violations of the rule against private inurement, thus exposing these expenses to a special excise tax.
  • Employees who are U.S. citizens will incur tax obligations with respect to their income received abroad.
  • Tax policy determinations may be in the discretion of local government officials.

Employment Issues / Advantages / “Disadvantages”
  • Typically, the hiring of a local nonprofit management entity will best limit employee liability issues. In this arrangement, the nonprofit essentially “rents” the employees, and the nonprofit would face no direct employer liability in the target nation.
  • Employment issues will be the U.S.nonprofit’s responsibility in whole or part by the formation of a joint venture or local establishment. It is important to conduct due diligence and a thorough review of the proposed contract for treatment of staffing/ employment issues under local law.
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  • Using a local nonprofit management company avoids employment liability issues.
  • May possibly supersede local laws by contract.
  • Greater control and selection of employees and management team.
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  • Some countries have restrictive employment statutes that are intended to protect employees, such as statutes that provide for without-fault termination indemnity.
  • Must follow local employment laws and regulations and some countries do not allow for local protections to be superseded by contract.
  • Various other laws, such as antidiscrimination laws, minimum wage rules, and vacation requirements, may also apply.
  • Many countries do not operate under "employment at will" rules.
  • Some countries also have statutes that penalize employers who terminate relationships with certain domestic business entities, such as advertising agents, without good cause.
  • If directly hiring local employees, it will be necessary to understand local payroll processes and withhold appropriate taxes.
  • U.S. citizens working in the target nation must comply with any applicable entry requirements. They must maintain valid passports and maintain any necessary work permits or visas.

Intellectual Property (IP) Issues / Advantages / “Disadvantages”
  • Depending on the target country, IP rights and protection may be a high risk issue. Thus, it is important to vet all contract provisions to ensure such rights are protected. (Current “red flag” countries include: China, SE Asia (including Singapore), Brazil, India, others)
  • Intellectual property protection dictated by local laws, and whether target country is a party to any international intellectual property convention to which the United States is also a party.
  • Protection for each of copyright, trademark, tradenames and service marks, trade secrets, and patents must be individually examined for target country.
  • Option to consider is creation of a separate/ new logo specifically for use with international affiliates or chapters, e.g., “ABC International Partner” (rather than licensing use of principal ABCtrademark itself)
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  • All World Trade Organization (WTO) members are parties to the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), which sets forth IP, copyright and patent protections. Certain “Developing” & “Least Developed” countries are granted additional time to implement TRIPS standards, or be subject to enforcement.
  • Register the nonprofit’s IP for local protection.
  • The nonprofit can contract to strict IP protection for use of its logo, trademark, etc. with “local entity”
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  • Copyright protection afforded in the target nation will depend on local laws, and whether target country is a party to international conventions along with the U.S.
  • IP must be individually registered.
  • Licenses typically required if protected materials (e.g., copyrighted or trademarked items) are used or provided at an overseas event.

Insurance Issues / Advantages / “Disadvantages”
  • Obtain and maintain insurance that will extend to international activities.
  • Review scope of existing coverage as supplemental insurance may well be needed.
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  • May be secured on a per-event basis, where the nonprofit is not entering into ongoing relationship in target nation
  • Protects against claims for activities performed locally.
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  • Depending on the terms of existing coverage, it may be necessary to acquire additional coverage to cover suits or claims brought in non-U.S. courts.
  • Note: Some countries require specific coverage, such as coverage for employees.

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Preliminary Considerations for a Nonprofit’s Potential Activities Abroad

Contract Issues / Advantages / “Disadvantages”
  • Specify governing law, excluding conflicts of laws provisions.
  • Specify forum for dispute resolution.
  • Specify that dispute should be conducted in English.
  • If working with an nonprofit management entity, contracts should specify that the relationship in performance of the agreement is solely that of an independent contractor, rather than a joint venture or partnership, and that persons providing services under said contract will do so under the control of the nonprofit management entity.
  • Specify IP protection provisions and permissible use of the nonprofit’s IP as well as “proprietary information.”
  • Any contract between the nonprofit and a foreign entity in the target nation would have to keep in mind any applicable taxation issues described above.
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  • Best to use U.S. law for dispute resolution, to the extent permitted by local law.
  • International agreements often require neutral arbitration (e.g., International Chamber of Commerce).
  • Check whether country is party to NY Convention on the Enforcement of Foreign Arbitral Awards to avoid enforcement by a de novo proceeding.
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  • Certain countries require local law for dispute resolution, e.g.,Brazil, for certain employment issues.
  • Often preferred to have dispute resolved in a U.S. court, if assets exist, or alternatively, through arbitration if target country is party to NY Convention on the Enforcement of Foreign Arbitral Awards.

Other U.S. Law Considerations / Advantages / “Disadvantages”
  • Exports of certain goods, software, technical data or technology (in support of a event or trade fair, e.g.) may be subject to U.S. export control regulations if of U.S.-origin or upon export from the U.S. or reexport to a third country, e.g., subject to U.S. Department of Commerce, Customs and Border Protection, Census Bureau, Fish & Wildlife or CITES, etc. licensing regimes.
  • Transactions by U.S. persons with certain countries, persons and entities are prohibited under various U.S.trade embargo and sanctions laws administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”).
  • Transactions by U.S. persons with foreign governments, “foreign governmental officials” and political parties are subject to various anti-bribery laws and regulations, for example the U.S. Foreign Corrupt Practices Act (“FCPA”) and the new and very broad UK Bribery Act, as well as any local anti-corruption legislation in the target nation.
  • The FCPA prohibits the nonprofit, from directly or indirectly paying, offering, promising to pay, with corrupt intent, anything of value to a “foreign official” to obtain or retain business, which has been interpreted to include the obtaining of permits for trade shows, and does not exempt non-profit organizations or charitable offerings.
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  • Analysis in advance of export, transaction or technical meeting effective to minimize inadvertent export violations.
  • Due diligence of potential partners (organizations), consultants, agents, contractors, is key for purposes of compliance with U.S. export controls and agency liability issues under anti-corruption legislation.
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  • Controlling laws and regulations are complex and violations are significant (e.g., civil penalties up to $250,000 per violation).
  • The nonprofit should screen partners, participantsandattendees to avoid violations of trade sanctions and embargoes. Same level of violations apply.
  • In administering theFCPA and other national anti-corruption legislation, governments have increasingly targeted individuals as well as small/medium sized companies.
  • Nonprofit entities are not exempt from the anti-bribery provisions of the FCPA.

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This document has been produced bythe law firm ofVenable LLP, 575 7th Street, N.W., Washington, D.C.20004.For more information, please contact Jeff Tenenbaum at or viatelephone at 202-344-8138.

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