- 1 Reviewing Foreign Legal Structures
- 2 Corporation, Partnership, or Flow-Through
- 3 Is It a Per Se Corporation?
- 4 Is it a Foreign Trust?
- 5 Is it a Pooled Fund?
- 6 Life Insurance
- 7 FBAR Due Date and Extension
- 8 Form 8938 Due Date and Extension
- 9 Form 3520 Due Date and Extension
- 10 Form 3520-A Due Date and Extension
- 11 Form 5471 Due Date and Extension
- 12 Missed Prior Year Foreign Account Reporting Deadlines?
- 13 Golding & Golding: International Tax Lawyers Worldwide
Reviewing Foreign Legal Structures
While US tax law can be difficult, the intricacies of international tax law can be overwhelming for many taxpayers. That is because taxpayers must navigate between two or more countries (and oftentimes) competing tax laws to successfully prepare and submit their US taxes and international information reporting forms. For example, what may be considered an estate planning tool in some countries (such as a Sociedad Anonima) may be considered a per se corporation under US tax law. Likewise, an entity such as Stiftung that may have been created for use as a foundation may be designated as a foreign trust under US tax law. Let’s take an introductory look at how you can evaluate a foreign legal structure.
Corporation, Partnership, or Flow-Through
The starting point for most analyses is to determine the type of structure it is considered under foreign law and then use that evaluation to determine how it may be classified under US tax law preferred example, Form 8832 provides a baseline understanding of how certain entities that are structured will be considered for US tax purposes.
Foreign default rule.
Unless an election is made on Form 8832, a foreign eligible entity is:
A partnership if it has two or more members and at least one member does not have limited liability.
An association taxable as a corporation if all members have limited liability.
Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.
Is It a Per Se Corporation?
If the foreign entity is a corporation, the next issue is to determine whether it is a per se corporation. When a foreign entity is deemed to be a per se corporation under US tax law, that means that the corporation cannot be disregarded. Some common examples are a Sociedad Anonima and a Canadian Corporation.
Is it a Foreign Trust?
If the foreign entity is neither a corporation, partnership, nor flow-through, then it may be considered a foreign trust. This is where it can get very complicated because a foreign trust can also include foreign pensions – because technically a foreign pension has all the makings of a foreign trust. Then it must be determined whether it is the type of foreign trust that has to report Form 3520/3520-A, or whether it can escape reporting on the Revenue Procedure 2020–17.
Is it a Pooled Fund?
Pooled funds are very common. Two very common types of foreign funds are mutual funds and ETFs. There are other versions of foreign pooled funds such as some unit trusts and mirror refunds, which can mimic a mutual fund. If the foreign fund is considered a pooled fund, then the question becomes whether the taxpayer must file Form 8621 – which is a complicated tax form – to disclose ownership in Passive Foreign Investment Companies (PFICs). Likewise, there are also some exceptions and exclusions when it overlaps with other forms such as Form 5471 — if it is a Passive Foreign Investment Company is also a Controlled Foreign Corporation.
Foreign life insurance or life assurance is a very common type of investment tool. It can be used to supplement a pension, or it can be used as an investment tool – but typically with foreign life insurance pension plans that are linked to investment funds (ULIPs) the primary goal is not the death benefit. Thus, it can become very complicated when reporting foreign life insurance — when the investment component is the majority of the investment – as well as the taxation in conjunction with annual increased value, subject to any reductions based on premium payments. US tax and reporting of foreign life insurance can be very complicated.
International Tax Forms You May Have Missed
Each year, US taxpayers who have foreign investments, accounts, pension plans, and life insurance policies may be required to report the values of their overseas assets — along with any income generated from them — to the Internal Revenue Service. When a taxpayer misses an international information reporting return deadline, it may lead the IRS to issue fines and penalties. Oftentimes these international penalties can be avoided or abated through one of the offshore voluntary disclosure programs — or other IRS amnesty procedure. It is important to note that not all foreign account filing forms have the same deadlines and due dates — and the process for seeking an extension will vary depending on the type of form. Let’s look at six important facts about foreign account filing deadlines.
FBAR Due Date and Extension
The FBAR is used to report foreign bank and financial accounts to the US Government. The Form is due on April 15, but is currently on automatic extension. Therefore, if you did not file the FBAR (FinCEN Form 114) by April 15, you still have until October to file it. And, you do not have to file an extension form such as Form 4868 or 7004 to obtain the FBAR extension — because the extension is automatically granted.
Form 8938 Due Date and Extension
Form 8938 is used to report foreign assets to the IRS in accordance with FATCA (Foreign Account Tax Compliance Act). It is similar (but not identical) to the FBAR. Form 8938 is filed with your tax return and is due when your tax return is due. If you are an individual filing a Form 1040, then the form 8938 would be due in April along with your 1040 tax return — but if you extend the time to file your tax return, then your Form 8938 will go on extension as well.
Form 3520 Due Date and Extension
Form 3520 is used to report foreign gifts and foreign trust information. The due date for Form 3520 is generally April 15, but taxpayers can obtain an extension to file Form 3520 by filing an extension to file their tax return for that year. Similar to Form 8938, there is no specific Form 3520 extension form required beyond requesting an extension of the underlying tax return.
Form 3520-A Due Date and Extension
Form 3520-A is used to report US ownership of a Foreign Trust. Unlike Form 3520, Form 3520–A is usually due in March and not April. In addition, the rules for filing an extension for Form 3520-A are different as well (subject to the substitute filing rules). In order to extend the due date to file Form 3520-A, the taxpayer must file a separate Form 7004 extension form.
Form 5471 Due Date and Extension
Form 5471 is used to report the ownership of certain foreign corporations. The filing date is the same as when a person’s tax return is due — and if the taxpayer files an extension for the underlying tax return, Form 5471 will go on extension as well. In recent years, Form 5471 has become infinitely more complex — so taxpayers should be cognizant of the different filing requirements and plan accordingly.
Missed Prior Year Foreign Account Reporting Deadlines?
If a taxpayer has not properly reported their foreign accounts, assets, or investments in prior years, they may want to wait before filing these documents for the current year. That is because Taxpayers should try to avoid making a quiet disclosure (which may result in significant fines and penalties). To do that, Taxpayers should submit to one of the offshore disclosure programs. Taxpayers may also want to consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in international tax matters before submitting to the IRS to get an understanding of the different requirements.
Golding & Golding: International Tax Lawyers Worldwide
Our FBAR Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.