Tax Filings and Disclosures for Foreign Entities
Note: All forms below can be retrieved via their hyperlink.
Filings for a Foreign Trust (or similar type entity)
A U.S. person who establishes and funds, directly or indirectly, a foreign trust that has a U.S. beneficiary must file the following Internal Revenue Service Forms:
Form SS-4— Application for a Tax Identification Number—in order to obtain a tax identification number for the foreign trust;
Form 56— Notice Concerning Fiduciary Relationship—advising the Internal Revenue Service of a trust relationship;
Form 3520— Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts—with respect to the creation and/or funding of the foreign trust (a yearly tax return), required under I.R.C. section 6048;
Form 3520-A— Annual Information Return of Foreign Trust With a U.S. Owner—with respect operations of the foreign trust (a yearly tax return), required under I.R.C. section 6048(b);
- Creates a trust or similar entity or transfers money or property to a foreign trust,
- Receives (directly or indirectly) any distributions from a foreign trust, or
- Receives certain gifts or bequests from foreign entities.
Form 709— Gift Tax Return—and a completed gift is made for gift tax purposes unless the trust instrument re-serves the right to the settlor to change the disposition of the foreign trust, after death, by his will or codicil; Form 1041— U.S. Income Tax Return for Estates and Trusts; and TD F 90-22.1— Report of Foreign Bank and Financial Accounts—must be filed by the settlor for having an interest in a foreign financial account. Schedule B, Part III of Form 1040 — Federal Income Tax Return—for having an interest in a foreign financial account and for creating a foreign trust.
International Bank and Brokerage Accounts
One of the most critical filing requirements is the Report of Foreign Bank and Financial Accounts. Anyone who is a signor or beneficial owner of a foreign bank or brokerage account(s) with more than $10,000 must disclose these accounts to the U.S. Treasury. This is commonly known as the FBAR form – and we can assist both in completion of the form and – if you are violation of the requirements – we can assist in bringing you into full compliance and in accordance with tax amnesty provisions.
The law imposes a civil penalty for not disclosing an offshore bank account or offshore credit card up to $25,000 or the greatest of 50% of the balance in the account at the time of the violation or $100,000. Criminal penalties for willful failure to file an FBAR can also apply in certain situations. Note that these penalties can be imposed for each year.
In addition to filing the Foreign Bank Account form, the offshore account must be disclosed on your personal income tax return, Form 1040, Schedule B.
Additional Reporting Requirement for Foreign Financial Assets
IRS Form 8938: – IMPORTANT NEW TAX FORM
By now most taxpayers are familiar with the FBAR, Foreign Bank Account Report, which is incredibly detailed as to bank accounts and investments held overseas. The new IRS Form 8938 is required by U.S. taxpayers who have an interest in foreign financial assets with an aggregate value exceeding $50,000 to report everything possible about those assets to the IRS. This does not affect taxability per se at this time and deals only with disclosure. The US imposes tax on worldwide income for US taxpayers.
Specified Foreign Financial Assets
Specified foreign financial assets include the following assets.
- Any financial account maintained by a foreign financial institution.
- Other foreign financial assets, which include any of the following assets that are held for investment and not held in an account maintained by a financial institution.
- Stock or securities issued by someone other than a U.S. person,
- Any interest in a foreign entity, and
- Any financial instrument or contract that has an issuer or counterparty that is other than a U.S. person.
A financial account is any depository or custodial account maintained by a foreign financial institution as well as any equity or debt interest in the foreign financial institution. A specified foreign financial asset includes a financial account maintained by a financial institution that is organized under the laws of a U.S. possession (American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands).
- It accepts deposits in the ordinary course of a banking or similar business
- As a substantial part of its business, it holds financial assets for the account of others.
A foreign financial institution includes investment vehicles such as foreign mutual funds, foreign hedge funds, and foreign private equity funds.
Other specified foreign financial assets.
Examples of other specified foreign financial assets include the following, if they are held for investment.
Foreign financial institution.
In most cases, a foreign financial institution is any financial institution that is not a U.S. entity and satisfies one or more of the following.
- It is engaged (or holds itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.
- Stock issued by a foreign corporation.
- A capital or profits interest in a foreign partnership.
- A note, bond, debenture, or other form of indebtedness issued by a foreign person.
- An interest in a foreign trust or foreign estate.
- An interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty.
- An option or other derivative instrument with respect to any of these examples or with respect to any currency or commodity that is entered into with a foreign counterparty or issuer.
Assets held for investment.
You hold an asset, including stock or a partnership interest, for investment if you do not use it in, or hold it for use in, the conduct of any trade or business.
Specified Foreign Financial Assets Required to be Reported
If you have an interest in a specified foreign financial asset and the total value of all of your specified foreign financial assets exceeds the reporting threshold applicable to you, report the asset on Form 8938 unless an exception to reporting applies.
You have an interest in a specified foreign financial asset if any income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset are or would be required to be reported, included, or otherwise reflected on your income tax return.
You have an interest in a specified foreign financial asset even if there are no income, gains, losses, deductions, credits, gross proceeds, or distributions from holding or disposing of the asset included or reflected on your income tax return for this tax year.
If you are the owner of a disregarded entity, you have an interest in any specified foreign financial assets owned by the disregarded entity.
A joint owner of an asset has an interest in the entire asset.
If you report your interest in a financial account, you do not need to report an interest in the assets held in the financial account.
Interests in assets generating certain unearned income of children
If you file Form 8814, Parents’ Election To Report Child’s Interest and Dividends, with your income tax return to elect to include in your gross income certain unearned income of your child (the “kiddie tax” election), you have an interest in any specified foreign financial asset held by the child.
Interests in assets held by entities that are not disregarded entities.
In most cases, you do not own an interest in any specified foreign financial asset held by a partnership, corporation, trust, or estate solely as a result of your status as a partner, shareholder, or beneficiary.
Interests in assets held by grantor trust.
If you own any part of a grantor trust, other than a domestic bankruptcy liquidating trust or a domestic widely held fixed investment trust, you own an interest in any specified foreign financial assets held by that part of the trust.
Interests in foreign estates and foreign trusts.
An interest in a foreign trust or a foreign estate is not a specified foreign financial asset unless you know or should have known of the interest. If you receive a distribution from the foreign trust or foreign estate, you are considered to know of the interest.
Unless an exception applies, the reporting period for Form 8938 is your tax year.
Figuring Maximum Value
You must provide the maximum value during the tax year of each specified foreign financial asset reported on Form 8938. In most cases, the value of a specified foreign financial asset is its fair market value. In most cases, you can make a reasonable estimate of the asset’s maximum fair market value during the tax year. An appraisal by a third party is not necessary to estimate the maximum fair market value during the year.
Assets with no positive value.
If the fair market value of a specified foreign financial asset is less than zero, use a value of zero both to determine if the total value of all of your specified foreign financial assets is more than the appropriate reporting threshold and to report the maximum value of the asset on Form 8938.
Foreign currency conversion.
If your specified foreign financial asset is denominated in a foreign currency during the tax year, the maximum value of the asset must be determined in the foreign currency and then converted to U.S. dollars. In most cases, you must use the U.S. Treasury Department’s Financial Management Service foreign currency exchange rate for purchasing U.S. dollars. If no Financial Management Service exchange rate is available, you must use another publicly available foreign currency exchange rate for purchasing U.S. dollars and disclose the rate on Form 8938.
Currency determination date.
Use the currency exchange rate on the last day of the tax year to figure the maximum value of a specified foreign financial asset or the value of a specified foreign financial asset for the purpose of determining the total value of your specified foreign financial assets to see whether you have met the reporting threshold. Use this rate even if you sold or otherwise disposed of the specified foreign financial asset before the last day of the tax year.
Reporting the value of jointly owned assets. If you own an asset jointly with one or more persons, you must report the asset’s value as follows.
Married specified individuals filing a joint income tax return.
If you are married and you and your spouse file a joint income tax return, report any specified foreign financial asset that you jointly own only once and include the maximum value of the entire asset (and not just the maximum value of your interest in the asset). Also, you must report any specified foreign financial asset that either you or your spouse separately owns and include the maximum value of the entire asset. If you file Form 8814, you must report any specified foreign financial asset your child owns only once and include the entire value of the asset.
Married specified individuals filing separate income tax returns.
If you are married, and you and your spouse are specified individuals who file separate income tax returns, both you and your spouse report any specified foreign financial asset that you jointly own on your separate Forms 8938, and both you and your spouse must include the maximum value of the entire asset on your separate Forms 8938. You also must report any specified foreign financial asset that you own individually on your separate Form 8938 and include the maximum value of the entire asset. If you file Form 8814, you must report any specified foreign financial asset your child owns and include the maximum value of the entire asset.
Other joint ownership.
If you are a joint owner of a specified foreign financial asset and you cannot use one of the special rules for married individuals, you must report the specified foreign financial asset and include the maximum value of the entire asset
Valuing interests in trusts. If you are a beneficiary of a foreign trust, the maximum value of your interest in the trust is the sum of the following amounts.
- If you receive distributions at the discretion of the trustee, the value of all of the cash or other property distributed during the tax year from the trust to you as a beneficiary, and
- If you receive mandatory distributions, the value using the valuation tables under section 7520.
Corporate Filing Requirements
There are a number of filing requirements for IBCs and International Trusts. Failure to file the required returns may result in civil and criminal penalties and may extend the statute of limitations for assessment and collection of the related taxes.
Form 5471 – Information Return of U.S. Persons With Respect to Certain Foreign Corporations must be filed by U.S. persons (this includes individuals, partnerships, corporations, estates and trusts) who owns a certain proportion of the stock of a foreign corporation or are officers, directors or shareholders in a Controlled Foreign Corporation (CFC).
1.A foreign corporation is a CFC if at least 50% of either the total voting power or total value of the stock of the foreign corporation is owned by U.S. persons, each of whom owns at least 10%. Stock held by family members is grouped together for the 10% test.
2. A U.S. Shareholder of a CFC may be taxed on his proportion of earnings even if the foreign corporation does not distribute them. Basically, a CFC is treated as an S-Corporation or pass-through entity for U.S. Reporting.
3.If you prefer not to be treated as a foreign corporation for U.S. tax reporting, you may be eligible to use Forms 8832 and 8858 below.
A foreign corporation or limited liability company should review the default classifications in Form 8832, Entity Classification Election and decide whether or not to make an election to be treated as a corporation, partnership, or disregarded entity. Making an election is optional and must be done on or before March 15 (i.e. 75 days after the end of the first taxable year).
Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities was introduced in 2004 and is to be filed with your personal income tax return if making the election on Form 8832. A $10,000 penalty is imposed for each year this form is not filed.
Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation is required to be filed by a “reporting corporation” that has “reportable transactions” with foreign or domestic related parties. A reporting corporation is either a U.S. corporation that is a 25% foreign-owned or a foreign corporation engaged in a trade or business within the United States. A corporation is 25% foreign-owned if it has at least one direct or indirect 25% foreign shareholder at any time during the tax year.
Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation is required to be filed by each U.S. person who transfers property to a foreign corporation if, immediately after the transfer, the U.S. person holds directly or indirectly 10% of the voting power or value of the foreign corporation. Generally, this form is required for transfers of property in exchange for stock in the foreign corporation, but there is an assortment of tax code sections that may require the filing of this form. The penalty for failing to file is 10% of the fair market value of the property at the time to transfer.
Form 8865—Return of U.S. Persons With Respect to Certain Foreign Partnerships
Form 8621—Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
NOTE: IN COMPLIANCE WITH INTERNAL REVENUE CIRCULAR 230, WE INFORM YOU THAT ANY U.S. FEDERAL TAX ADVICE CONTAINED IN THIS COMMUNICATION IS NOT INTENDED TO BE USED, AND CANNOT BE USED, FOR THE PURPOSE OF (1) AVOIDING PENALTIES UNDER THE INTERNAL REVENUE CODE OR (2) PROMOTING, MARKETING, OR RECOMMENDING TO ANOTHER PARTY ANY TAX-RELATED MATTER[S] ADDRESSED HEREIN. NOTHING CONTAINED HEREEIN SHALL BE DEEMED TO BE THE GIVING OF PROFESSIONAL ADVICE. YOU SHOULD SEEK ADVICE FROM A COMPETENT PROFESSIONAL. WE ASSUME NO RESPONSIBILITY FOR THE CONTENTS HEREOF.