1. 1 Cross border philanthropy from a European perspective American Bar Association Section of International Law Fall meeting 27 October 2005, Brussels Ineke A. Koele, attorney and tax lawyer Van Mens & Wisselink, the Netherlands koele@vmw.nl

2. 2 The Dutch treat

3. 3 The Dutch flexible foundation Very liberal law tradition Philanthropy is private property, therefore little control No restrictions in international philanthropy; Full exemption of taxes (gift tax, corporate tax) Onshore structure, with protection of EU treaty and bilateral treaty

4. 4 Dutch flexible foundation Income tax deduction available for non-residents, to be offset against any Dutch source income Mixed charitable / private purpose foundation is possible (various techniques available to support private interest) Any corporation held by charitable foundation may benefit from exemption, if properly structured

5. 5 Dutch flexible foundation Retention of voting power of gifted assets is possible through use of separate ‘Stichting Administratiekantoor’ (voting trust) Problem with US residents: credit method as means to avoid double taxation creates virtual double taxation in case of income tax deduction in the Netherlands Joint ventures with companies, private foundations are no issues in the Netherlands

6. 6 So where’s the Dutch treat? Required: residence in the Netherlands, three independent board members, majority should be Dutch residents Recommended: to obtain an advance ruling, and to include an exit provision (conditional revocable clause) in case of change of law Result: no issues regarding international giving

7. 7 General: Tax Privileges Are Landlocked No income tax deduction when donated abroad (treaties do not allow either) Potential high gift and inheritance tax rates No planned giving facilities (US) No equal exempt treatment for foreign philanthropic organisations

8. 8 Rationale landlock Lack of common concept ‘public benefit’ Lack of actual national benefit Lack of control on international flow of grantmakings No trust in foreign supervisory regime Great differences in notion of and functioning of charitable organizations

9. 9 Convincing rationale? Is equivalency required? To what extent? ‘National benefit’ is obsolete since charities generally are allowed to carry on activities and spend abroad Who should be in charge of control? Authorities of donor country or donee country ? There is no principal distrust between countries (e.g. EU continental ‘public’ charities qualify in US)

10. 10 Arbitrary exceptions to landlock Netherlands: reciprocity requirement for gift tax, discretionary power to allow income tax deduction for gift to foreign charities with multinational/ Dutch purposes Canada: a foreign charity to which Her Majesty in right of Canada has made a gift during the individuals’ taxation year or 12 months immediately preceding

11. 11 Arbitrary exceptions to landlock US: gift and estate tax exempt, but taxable if foreign recipient is a private foundation that does not meet all US requirements for private foundations Move of situs and asset strips remains without consequence in many countries

12. 12 EU law: freedom of capital ECJ 11/12/2003 Barbier, gift to foreign organization is subject to EU freedom of capital Restrictions on freedom of capital should meet the ‘rule of reason’ Recent ECJ court cases are very strict (Lenz, Manninen, Fokus)

13. 13 Rule of reason freedom of capital No reciprocity requirement is allowed (quid pro quo), ECJ 28/01/1986, Avoir fiscal Discretionary exception of landlocked privilege is not allowed if in domestic context allowance ex iure, ECJ 8/5/1990 Biehl I : Freedom of capital should not be contingent on discretionary powers of authorities; Required control should be in proportion to domestic control (if little domestic control….)  if no control on emigration charity, control is no argument for landlock

14. 14 Only sensible rationale landlock: control Normative level of control (equivalency, destination funds) Tax relief may be contingent on non-discriminatory and objective criteria within EU law, ECJ Egon Schempp 12 July 2005 Laws should require international control on flow of money in order to grant tax relief: control not necessarily exercised by domestic charity (what if charity emigrates?)

15. 15 Solving the landlock: in control Scenario A (likely for private foundations): donor is responsible; only tax relief in home country after provision of sufficient proof to domestic authorities on status foreign charity and operational requirements; proportionality Scenario B (likely for public charities): foreign charity is responsible; should register in donor’ country, virtual residence, or evt. appoint tax representative in home country donor tax credit withheld by recipient charity; release upon control reliable information.

16. 16 Solving the landlock: in control Proof should be made available by persons closest to source; communication on different law requirements by bi-national lawyer’s letters, no good faith; Tax relief should ideally be given only upon charitable result (reports) not on due diligence efforts; Foreign charities should be held responsible like domestic charities (re public charities: no adverse consequences for donors)

17. 17 4 steps to solve the landlock Step 1: normative equivalency and operational tests should be determined; what is essential? Step 2: equal treatment foreign and domestic charities, foreign charities may have more burdensome onus of proof (but proportionality) Step 3: development of international charity law practice between specialised lawyers Step 4: development of international practical standards as to operational tests, safeguards against diversion of charitable flows of money etc.

18. 18 Landlock solved