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Michael A.Heimos, Esq.
Michael A. Heimos PC, Denver, CO
Account Tax Compliance Act (FATCA), enacted as part
of the Hiring Incentives to Restore Employment (HIRE) Act in
2010,1 imposes an
obligation on specified U.S. persons - U.S. citizens, U.S.
residents and nonresident spouses who elect under §6013(g) to be
treated as U.S. residents for income tax purposes - who hold
beneficial interests in any foreign trusts (including a foreign
retirement plan/ employee benefit trust) or foreign estates to
report such interests on Form 8938 on their U.S. income tax
returns.2 In the case of a
beneficial interest in a foreign trust, this obligation exists
whether or not the trust is treated as a grantor trust for U.S.
income tax purposes, although in the case of a non-grantor trust
the U.S. person need report only the trust interest and not the
assets held by the trust.
persons who are treated as owning any portion of a
foreign grantor trust, this reporting may be done by means of IRS
Form 3520, Annual Return to Report Transactions with Foreign
Trusts and Receipt of Certain Foreign Gifts, or, in the case
of a trust that must report, Form 3520A, Annual Information
Return of Foreign Trust with a U.S. Owner (under section
6048(b)). Special rules also apply for reporting the maximum
value of an interest in a foreign trust, a foreign retirement plan,
or a foreign estate.
The IRS has provided an exception to
reporting so that a
specified U.S. person holding a beneficial interest in a foreign
trust or a foreign estate who does not know or have reason to know
of the interest is exempt from reporting the interest. For this
purpose, receipt of a distribution from a foreign trust or foreign
estate causes the recipient to be deemed to have knowledge of the
beneficial interest. Other exceptions from reporting apply as to
certain special types of trusts; for example, a U.S. beneficiary of
a domestic bankruptcy trust or a domestic, widely-held fixed
investment trust is not required to report on Form 8938 any
specified foreign financial asset held by the trust.
In addition to the impositions on foreign trust and estate
beneficiaries, FATCA requires that "foreign financial institutions"
must enter into disclosure compliance agreements with the IRS
concerning their U.S. account and equity holders, or else be
subject to a 30% withholding tax on the institution's U.S. source
interest, principal and dividend payments and stock sale proceeds
beginning, in part, on July 1, 2014.3 The
term "foreign financial institution" (FFI) is broadly defined and
includes any foreign depository, custodial or investment entity,
including any foreign trust or family office that is professionally
managed by an entity.4
disclosure requirements (and the due diligence steps
required to determine whether an FFI has U.S. account or equity
holders and to identify such holders) may conflict with
constitutional, anti-discrimination, privacy and other laws that
apply locally to FFIs. Nevertheless, FFIs must register with the
IRS in order to be compliant with FATCA, leaving many FFIs in a
quandary: to comply with FATCA and risk violating local
laws/duties, or divest of all their U.S. situs assets to avoid
exposure to the 30% withholdings. In an attempt to make the
FATCA pill less jagged, the Treasury Department has entered into
Intergovernmental Agreements (IGAs) with more than 20 countries
that allow for the waiver of local bank secrecy laws and modify
some of the statutory and regulatory FATCA due diligence and
reporting requirements.5 The
Treasury has prepared model IGAs as a starting point for
negotiations with various partner countries to implement FATCA.
Foreign investment entities that are not
considered FFIs, such
as foreign trusts or family offices that are not professionally
managed by an entity, are treated as "non-financial foreign
entities" (NFFEs) that are subject to the 30% withholding tax on
the "withholdable payments" described above if they do not disclose
to the relevant withholding agents their "substantial United States
owners" (those U.S. persons directly or indirectly holding more
than a 10% interest in the NFFE). NFFEs are not, however, required
to register with the IRS.
For more information, in the Tax Management Portfolios, see
Heimos, 806 T.M., Immigration and Expatriation Law for the
Estate Planner, Rothschild and Rubin, 810 T.M., Asset
Protection Planning, Heimos, 837 T.M., Non-Citizens -
Estate, Gift and Generation-Skipping Taxation, Zaritsky and
Rosen, 854 T.M., U.S. Taxation of Foreign Estates, Trusts and
Beneficiaries, Zaritsky and Rosen, 911 T.M., U.S. Taxation
of Foreign Estates, Trusts and Beneficiaries, and in Tax
Practice Series, see ¶7170, U.S. Income Withholding and Reporting
Requirements and FATCA.
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