by Shuey Fogel
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.
- 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.
- 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).
- 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:
- Cannot be organized or operated for private benefit
- 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 and 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.
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.
Shuey Fogel is a nonprofit professional turned banking specialist. He is currently Director of Nonprofit Services for an Israeli bank. Shuey shares relevant conversations, articles, and experiences on his blog, nonprofitbanker.com.
Additional information on the structure of Israeli charities can be found in a previous post, Defining an Amutah [an Israeli Charitable Organization].
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.