Foreign organizations that are private foundations and that have been granted tax-exempt status under U.S. tax law are required to pay an excise tax equal to four percent of their gross investment income received from sources in the United States, any territory, any political subdivision of a territory or the District of Columbia. An exception to this rule is made when a tax treaty between the United States and the foreign country of which the private foundation is a resident specifically exempts income received by these organizations from any tax.
Foreign private foundations receiving at least 85 percent of their support (excluding gross investment income from sources outside the United States are not subject to the taxes on self-dealing, failure to distribute income, excess business holdings, investments that jeopardize charitable purposes, and taxable expenditures. Such foundations also are not subject to section 507, relating to termination of private foundation status, and section 508, regarding special rules for giving notice that they are applying for recognition of exempt status.
An exempt organization that is organized in a foreign country and receives a substantial portion of its support from a foreign government is not a private foundation.
A foreign private foundation can have its exempt status terminated for repeatedly engaging in prohibited transactions. A prohibited transaction is an act or a failure to act by a foreign organization that, if engaged in by a domestic organization, would subject the domestic organization to the taxes and sanctions imposed on private foundations.
If a foreign private foundation engages in one such act or failure to act, and has been warned by the IRS that a second act or failure to act would result in a prohibited transaction, the second act or failure to act will be considered a prohibited transaction.
The repeated act or failure to act does not necessarily have to be related to the earlier act or failure to act that caused the Service to issue a warning.
Any foreign private foundation whose exemption has been terminated under the provisions outlined earlier may reapply for exemption by filing a Form 1023 in the 2nd tax year following the tax year in which exemption was denied.