Anchoring your philanthropic efforts in Asia
Philanthropists around the world use a variety of different structures to power their work. Sitting in between full-fledged foundations and direct donations, new legal models, such as limited liability companies (favoured by Mark Zuckerberg), donor-advised funds (favoured by Elon Musk), and decentralised autonomous organisations (favoured by his brother Kimble Musk) are growing in popularity.
Although charitable giving is an age-old tradition in Asia, structured philanthropy in the modern sense is relatively new to the region. In recent decades, many families have been setting up foundations or charitable trusts to create legacies and support local and global initiatives. As more and more families engage with philanthropy, due in part to the ever-increasing levels of private wealth across the continent, the number of foundations has skyrocketed in recent years.
Why do I need a philanthropic vehicle?
First, setting up your own philanthropic vehicle can help to build and strengthen the legacy of your work. A foundation that carries the family name associates the impact it creates with that family’s values. What’s more, the family legacy can live on even when the family no longer plays an active role.
Second, a philanthropic vehicle can facilitate the kind of philanthropy you want to pursue. If you want to run your own programmes and employ staff, setting up a foundation could be the best option.
Third, choosing the right philanthropic vehicle can be helpful for the long-term management of your philanthropic capital.
Choosing the right location – key deciding factors
Many philanthropists choose their home countries by default, but some choose a different location or several. Below we present some of the key factors to consider when choosing a location for your philanthropic vehicle.
Registration: Registering a foundation or charitable trust in Asia is generally more complex than setting up a company, as the latter has been loosened due to the pro-business mindset that has fuelled the region’s rapid growth in recent decades.
Governance: The governance structure of a philanthropic vehicle determines the resources and efforts required to run it. To increase public trust in philanthropy, the governance of philanthropic structures is strictly regulated in some Asian countries.
Activities: Most philanthropists naturally prefer to operate in jurisdictions that impose few restrictions on the activities that their philanthropic vehicle can conduct. Another consideration is that with philanthropic vehicles often enjoying preferential tax treatment from regulators, many countries want to put in place some constraints so that a foundation’s charitable purposes are clear and to ensure that most of the benefits reach the local community.
Financial: A key aspect for any philanthropic vehicle is managing its inflows, outflows and investments. Ideally, the structure should be able to receive tax-deductible contributions, control the pace of its pay-outs and seek to increase the value of its philanthropic capital with minimal restrictions on the investment strategies it pursues. Rules governing such matters vary widely across Asia.
Hotbeds of Asian philanthropy
As two major financial hubs in the region, Hong Kong and Singapore have been attractive destinations for philanthropic vehicles for many years. They both offer certain advantages and disadvantages. With the two cities trying to attract more investors, especially family offices, in recent years, the regulatory environment for philanthropy has received increasing attention, and looks set to continue to do so.
Hong Kong offers one of the most flexible environments for philanthropic vehicles in Asia. There are limited regulatory requirements regarding governance structures, few restrictions on the activities the vehicles may conduct, and significant leeway regarding fundraising and asset management for the endowment. This enables the philanthropic vehicles to support a range of activities around the world with a relatively light administrative burden.
However, partially as a victim of its own success, the registration process has slowed down significantly, and there is currently a long backlog. It can take up to a year to register a charity in Hong Kong. And despite an unsuccessful attempt to introduce an ordinance on charities and set up dedicated government agency to manage the affairs, the entire eco-system now still relies on a network of precedents and policies that are relatively uncertain.
Thanks to the 250% tax deduction for IPCs, Singapore offers one of the world’s most generous tax policies to encourage philanthropy. However, it still differentiates between philanthropic capital for local and overseas activities, with policy primarily supporting local initiatives. For example, the country’s 80/20 rule requires charities involved in raising funds from the Singaporean public to allocate at least 80% of the funds raised to Singapore-based projects. There are also specific requirements covering the governance of charities, including the number of local board members, and regulatory and disclosure requirements are relatively stringent.
A new trend in Asia: donor-advised funds
As we mentioned earlier, many philanthropists in the US and Europe are choosing a middle ground between direct donations and establishing a dedicated foundation by setting up donor-advised funds. These vehicles are giving accounts established at a public charity that enable donors to make charitable contributions, receive an immediate tax deduction and recommend where grants from the fund are directed to?.
This option provides a number of benefits, including the ability to give anonymously, tax advantages, simplicity and cost-effectiveness. They also enable donors whose amount of assets may not warrant the administrative costs of running a separate foundation to set up a platform for ongoing engagement and to create a legacy. An additional benefit is that there are no minimum payout requirements. In some countries, however, DAFs have attracted negative headlines due to their relatively secretive nature, limited oversight and the fact they are under relatively little pressure to make donations.
DAFs are still quite a new concept in Asia. Singapore has been a pioneer, with the Community Foundation of Singapore a prominent example, serving as an umbrella platform for DAF accounts. With more countries looking at new ways to encourage giving, we expect DAFs to gain in prominence.
Setting up a legally registered entity to power your philanthropy needs a lot of careful thought, not only in terms of choosing the right vehicle, but the right location. Hong Kong and Singapore are attractive options in the eyes of many Asian philanthropists, but other Asian countries are catching up and updating their policies to attract the increasing amount of philanthropic wealth in the region. We are confident that these developments will help Asian philanthropists increase their impact and achieve their goals.