Tax Filings and Disclosures
for Foreign Entities
Note: All forms below can
be retrieved via their
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
Receives (directly or indirectly) any distributions from a foreign
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
- 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
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).
– 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.
- 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.
- 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
Form 8865—Return of U.S. Persons With Respect to Certain Foreign
Form 8621—Return by a Shareholder of a Passive Foreign Investment Company or
Qualified Electing Fund
FOR FURTHER ASSISTANCE WITH YOUR TAX PLANNING
AND COMPLIANCE, CONTACT THE INTERNATIONAL TAX DEPARTMENT AT GERBER & CO.
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