How does tax impact Family Office philanthropy?

We recently sat down with Mike Linter, Global Head of Private Enterprise Tax, Global Tax and Legal, KPMG International, and Greg Limb, Global Head of Family Office and Private Client, KPMG International, to discuss how tax rules across jurisdictions can impact families in philanthropy.

So, how does tax impact family offices and private enterprises in their philanthropic activities? Hear what they have to say below:

Greg Limb: For many years, philanthropy has played an important role in societies around the world, with it becoming increasingly important during economically and socially challenging times. For example, as the world continues to transform from the economic impact of the COVID-19 pandemic, we are seeing a pivot towards a new normal, with the increasing desire for wealthy individuals and successful businesses to create impact and leave lasting legacies in their communities and beyond.

As a result of this, we see the emergence of a new wave of modern philanthropists — those who are adopting innovative approaches and structures to philanthropy. The simple act of giving away money to deserving causes, while still at the heart of philanthropic endeavor, is not enough. New ways of giving are emerging, with philanthropists taking the very best of the corporate world and adding discipline to social causes.

Mike Linter: The first step is choosing the right structure. The framework for effective giving will naturally vary from country to country and person to person, but the important common thread is that a strategic framework is necessary to provide direction to activity, to provide the basis for measuring impact, to enable meaningful collaboration, and to provide a sustainable forum.

Choosing the right structure for activity is dependent on many different factors including local regulations, tax regimes, cultural norms and historical activity, as well as whether it is pursued personally or via a business. The ultimate purpose for giving will likely factor in that decision-making. Family and corporate foundations are the most commonly adopted structures, and for good reason. They can help provide clarity on where to direct funds and how to respond to requests for funding. More importantly, they provide the vehicle to engage and collaborate with other foundations, philanthropists, governments and NGOs.

Direct giving continues however to remain popular and effective, allowing philanthropists and their families to support more personal projects, often in communities and causes near to them.

On that note, many businesses decide to keep the family philanthropy separate from the company policy on philanthropy, so that the one does not succumb to the constraints of the other, even if they have similar values and motivations. In this way, neither the reputation of the family nor of the business is at stake, should either of them be subjected to criticism.

Greg Limb: I’d like to add that there is no “one-size fits all” in terms of choosing the right structure for philanthropic activity. So rather than jump to an approach, it is important to understand the ‘why’ to help get to the best ‘how’.

Successful entrepreneurs often want to give back in terms of money, time and expertise. They also want to be able to demonstrate the impact of their activities. To illustrate this, let's say a client wished to help start-up businesses struggling to obtain financing following a similar experience at the beginning of their career. Initially, credit facilities were provided on an ad hoc basis, but without a strategy or clear plan of what they wanted to achieve, it proved difficult to measure the impact, which took away some of the passion. This is where some formality in terms of the criteria for helping start-ups, the services to provide and what is expected in return, are key in helping to ensure that the philanthropist creates maximum impact. In this instance, a not-for-profit company was suggested to provide some separation from him personally too.

Corporate experience also plays a role in choosing the right structure. Philanthropists with their roots in private equity, for example, adopt structures where they can bring about the most effective change and that enable levers to be pulled to ripple change over a much wider area, whereas those from a venture capital background choose structures that allow them to stay close to projects in which they invest and see first-hand how the money is used.

Mike Linter: Firstly, let’s look at tax incentives. Non-profit organizations are exempt from corporate tax in many countries and donors are generally entitled to a deduction/ tax credit for gifts made to registered non-profit organizations. However, some countries offer additional tax incentives in respect of gifts of specific assets or to specific organizations.

For example, in Canada, publicly traded shares donated to a registered charity are exempted from capital gain taxes in addition to the deduction or tax credit granted to the donor. In Singapore, donations to charities that have the Institutions of a Public Character (“IPCs”) status can give rise to a deduction representing 250% of the amount of the gift. However, the residence status of the donor remains the key consideration in choosing the country of the philanthropic structure or the gift since the tax incentives are only useful if the donor is subject to tax in this country.

Despite the tax incentives, many philanthropists often decide to establish their structure in a country because of other considerations, such as transparency, geographical reach, causes and regulations.

Let’s now jump to transparency. Confidentiality is an important aspect for many philanthropists and the level of confidentiality granted to charitable organizations varies greatly between countries. Some countries, like Canada, the UK and Germany require non-profit organizations to file information returns that are made available to the public, while in other countries, like Austria and Jersey, such information returns are kept confidential.

The intended geographical reach of the causes supported by the philanthropist can also play an important role in choosing the right structure. Many countries, like the U.S., Canada and Austria allow charities to conduct activities in any region and country. In contrast, in other countries, like South Africa and Singapore, charities can only conduct activities that benefit wholly or substantially the public of the country.

The range of causes recognized as charitable purposes also varies from a country to another. Some countries have a very broad definition of a charitable purpose. This is notably the case of the Netherlands that provide that a charity must serve the public or general interest. Other countries provide a specific list of causes that can be considered as charitable purposes, like Austria and South Africa. Philanthropists that seek flexibility in the causes that they can support could therefore turn to countries that allow a wide range of activities instead of countries that have stricter rules.

Finally, regulations. In addition to the causes that can be recognized as charitable purposes, some countries have very strict rules on the way that the charities can conduct their activities. For example, some types of charities in Canada, Australia and the U.S. are required to contribute annually amounts for charitable purposes that generally represent 5% of the fair market value of their assets and in Singapore, charities are required to keep their fundraising expenses ratio below 30% of their fund-raising receipts. Many countries also prohibit a charity from lobbying or engaging in any activities that support or oppose a political party or legislation. This is the case notably in Canada and in the U.S.

Just like choosing the right structure, there is no ‘one size fits all’ in terms of choosing the right country for pursuing philanthropic activities and it is important to understand the philanthropist’s main drivers.

Greg Limb: Two main trends have emerged in the recent years, the trend to measure and demonstrate impact, and the trend of impact investing.

Firstly, one of the most significant changes to emerge from today’s philanthropists is the recognition of the need to measure and demonstrate impact. While today’s philanthropists may be driven by the same desires as their forebears, wanting to give back to society, they differ in the confidence of their ambition, their international reach, the structures adopted and the discipline of measuring impact. The influence of commercial enterprise and the greater discipline adopted by philanthropists are changing the way activity is measured and evaluated. It is not, however, a perfected art, with philanthropists only now beginning to explore the role that increased amounts of data available to them can play. Measuring the return on investment and the return on effort will continue to evolve and change as philanthropists have ever greater access to data from the projects and causes they support.

Another significant change in today’s philanthropists is the emergence of impact investing and intentional giving. Technology has not only enabled a new channel for donations, but also a platform to expose systemic inequities, raise public awareness about the need for change and highlight global leading practices. With this awareness, private enterprises are becoming more intentional about their philanthropy. For instance, many private enterprises are serious about integrating environmental, social and governance (ESG) factors into their operations, whether it's addressing climate impacts of the business, making donations to the community, enhancing health and safety or ensuring board diversity.

While impact investing is still in its infancy, there is a shared belief among philanthropists that their proportionate allocation will increase substantially over the short term. At the same time, we are witnessing large global capital allocations towards environmental, social and governance (ESG) investment strategies. All this capital is seeking impact — the core business of philanthropic organizations. Philanthropists will, naturally, have different goals and aims, but there is a clear trend towards impact investment where track record and measurable societal impact are aligned.

Greg Limb: It’s crucial to design a plan. Private enterprises looking to make a philanthropic impact should begin with an analysis of their philanthropic values, which can help to identify their priority issues. From there, they can develop a plan to achieve their philanthropic goals. Each enterprise's philanthropic plan is unique and might involve improving the ESG and CSR performance of the operating company, setting up a private foundation, using a donor-advised fund with a public foundation, or working collectively with other funders. It could also involve defining the roles of family members, choosing charity partners and engaging advisors.

Mike Linter: I’d also add that it’s critical to choose the right advisors. Designing a strategy and plan for philanthropy and impact can be challenging. The right advisor can help you define your philanthropic values, select an appropriate charitable vehicle, identify governance considerations and operational processes, and develop a plan for evaluation.