International grantmaking withholding requirements.

• Author: Sair, Edward A.
• Position: Grant-funded activities performed by foreigners in US

Effective Jan. 1, 2001, final regulations require foundations making grants or awarding prizes to foreign individuals or foreign organizations that perform all or part of their grant-funded activities in the U.S. to withhold U.S. taxes from payments. Exemptions are allowed if the grant recipient qualifies for an exemption under a U.S. tax treaty or if the recipient entity shows that it can qualify as a tax-exempt organization in the U.S. If activities funded by a grant are conducted entirely outside the U.S., withholding is not required. The IRS can penalize foundations that fail to withhold or take advantage of the exemptions without filing the required forms.

Regulations' Impact

The regulations may trigger a withholding requirement if even a small part of a grant to a foreign entity is to be used in the U.S. Also, sometimes a grant covers travel and lodging expenses but does not compensate a grantee for his time spent in the U.S. It would seem that the grant should be excludible from income (according to a recent Service directive for foreign scholars visiting U.S. universities), but the final regulations appear to conflict with this interpretation.

Three possible solutions may be available to avoid withholding:

* Make a grant with the stipulation that the money be used only for activities that take place exclusively outside the U.S.

* Write two grants: one for the portion not used for activities in the U.S., the other for the portion used for activities in the U.S., and withholding only on the latter portion.

* Obtain an exemption from the withholding requirement by qualifying for exempt status in the U.S.; this option would require a tax determination letter from the IRS or a written opinion from a U.S. attorney.

The regulations' withholding requirement could conflict with a general information letter the Service released last May, IRS Information Letter (4/18/01), affirming that a...