The Definition of a Foreign Financial Institution: What does it Mean?

The Definition of a Foreign Financial Institution: What does it Mean?

Definition of a Foreign Financial Institution 

In order to determine whether or not certain US persons are required to report foreign accounts, such as bank accounts, investment accounts, and other investments, the person must determine if the asset is held at a foreign financial institution. The term ‘foreign financial institution’ is defined in detail under U.S.C. Title 31 Money and Finance — and it is very important since it can determine whether certain international information reporting forms are required to be filed. Of all the foreign tax forms the IRS requires taxpayers to file, the FBAR (FinCEN Form 114). And, unlike many other foreign tax forms, the FBAR is not technically part of the Internal Revenue Code, but rather is covered under Title 31 of the USC and not 26 (Internal Revenue Code). Let’s take a look at the definition of a Foreign Financial Institution.

TITLE 31: Money and Finance

The definition of a Foreign Financial Institution can be found prominently in the Code of Federal Regulations (CFR) under Title 31 Money and Finance. Let’s take a look and breakdown the definition by focusing on the key terms:

31 CFR § 561.308 Foreign Financial Institution.

      • The term foreign financial institution means any foreign entity that is engaged in the business of accepting deposits, making, granting, transferring, holding, or brokering loans or credits, or purchasing or selling foreign exchange, securities, commodity futures or options, or procuring purchasers and sellers thereof, as principal or agent. It includes but is not limited to depository institutions, banks, savings banks, money service businesses, trust companies, securities brokers and dealers, commodity futures and options brokers and dealers, forward contract and foreign exchange merchants, securities and commodities exchanges, clearing corporations, investment companies, employee benefit plans, dealers in precious metals, stones, or jewels, and holding companies, affiliates, or subsidiaries of any of the foregoing.

      • The term does not include the international financial institutions identified in 22 U.S.C. 262r(c)(2), the International Fund for Agricultural Development, the North American Development Bank, or any other international financial institution so notified by the Office of Foreign Assets Control.

Entity: 31 CFR § 561.316

      • The term entity means a partnership, association, trust, joint venture, corporation, or other organization.

Agent: 31 CFR § 561.311

      • The term agent includes an entity established by a person for purposes of conducting transactions on behalf of the person in order to conceal the identity of the person. 

Money Service: 31 CFR § 561.317

      • The term money service businesses means any agent, agency, branch, or office of any person doing business, whether or not on a regular basis or as an organized business concern, in one or more of the capacities listed in 31 CFR 103.11(1) through (5).

      • The term does not include a bank or a person registered with, and regulated or examined by, the Securities and Exchange Commission or the Commodity Futures Trading Commission. 

31 CFR 103.175 Definitions

Another definition of Foreign Financial Institution can be found in 31

      • Foreign financial institution.

            • (1) The term foreign financial institution means:

              • (i) A foreign bank;

              • (ii) Any branch or office located outside the United States of any covered financial institution described in paragraphs (f)(1)(viii) through (x) of this section;

              • (iii) Any other person organized under foreign law (other than a branch or office of such person in the United States) that, if it were located in the United States, would be a covered financial institution described in paragraphs (f)(1)(viii) through (x) of this section; and

              • (iv) Any person organized under foreign law (other than a branch or office of such person in the United States) that is engaged in the business of, and is readily identifiable as: (A) A currency dealer or exchanger; or (B) A money transmitter.

            • (2) For purposes of paragraph (h)(1)(iv) of this section, a person is not ‘‘engaged in the business’’ of a currency dealer, a currency exchanger or a money transmitter if such transactions are merely incidental to the person’s business.

Title 26 (Internal Revenue Code)

In addition to the code section above under Title 31, there is also a definition under the Internal Revenue Code as well. (26 U.S. Code Chapter 4 – Taxes To Enforce Reporting on Certain Foreign Accounts).

26 U.S. Code § 1471

Foreign Financial Institution

(4) Foreign Financial Institution

      • The term “foreign financial institution” means any financial institution which is a foreign entity. Except as otherwise provided by the Secretary, such term shall not include a financial institution which is organized under the laws of any possession of the United States. Source 26 USC § 1471(d)(4).

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.