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Tax Law

FATCA's Application to Foreign Entities and Foreign Assets

Editor's Note: The following is an excerpt from Chapter 6 of the forthcoming LexisNexis® Guide to FATCA Compliance by William Byrnes and Robert Munro, scheduled for publication in May 2013.

Types of Entities

The Foreign Account Tax Compliance Act ("FATCA") provides for withholding taxes to enforce reporting requirements on specified foreign accounts owned by specified U.S. persons or by U.S. owned foreign entities. 

FATCA requires specified U.S. persons (U.S. citizen, residents and certain non-resident aliens) and specified domestic entities to report interests in specified foreign financial assets (SFFAs) if the aggregate value of those assets exceeds certain threshold.  The regulations apply to domestic entities formed or availed of to hold, directly or indirectly, specified foreign financial assets. These specified entities include certain closely held corporations and partnerships that meet certain conditions and aggregation rules. Specified entities include domestic trusts if they meet certain criteria and exceed certain reporting threshold.   

A U.S. owned foreign entity is an entity with one or more substantial U.S. owners.  With certain exceptions, a substantial U.S. owner is any U.S. person with greater than 10% direct or indirect ownership interest in the foreign entity. 

FATCA applies to U.S. persons who have specified foreign financial assets (SFFAs) whose value exceeds certain thresholds. The IRS announced in January 2013 that reporting by domestic entities with interests in specified foreign financial assets will not be required to file the IRS reporting form for FATCA, Form 8938, until after the date specified by final regulations, which will not be earlier than taxable years beginning after December 31, 2012.1

All foreign entities and foreign trusts are potentially subject to FATCA, in addition to the current Qualified Intermediary (QI) rules. Withholding rules and reporting requirements under FATCA depend upon the entity’s classification. FATCA classifies foreign entities as either financial entities or non-financial entities. Financial entities are classified as Foreign Financial Institutions (FFIs) [see Chapter 7] while non-financial entities are classified as Non-Financial Foreign Entities (NFFEs) [see Chapter 8].

Entities and trusts are very different under U.S. law. Entities include partnerships, limited liability companies (LLCs), international business companies (IBCs), foundations, usufructs, and corporations. In entities, the title to the property owned is not divided.

In a trust, however, U.S. law splits the ownership of the title into two parts, legal and equitable. The trustee of the trust owns the legal title for the benefit of the beneficiary, who owns the equitable title. A trust is a relationship, not an entity, and is treated differently under both the existing QI rules and FATCA.

Specified Foreign Financial Assets (SFFAs)

          Financial Accounts

The most common type of SFFA that banks will encounter is a financial account such as any depository or custodial account that is maintained by an FFI.2 A financial account also includes non-publically traded equity or debt interest in a depository or custodial institution, an insurance company, or an investment entity.3

Moreover, a financial account includes a non-publically traded equity or debt interest in a holding company or treasury center in an expanded affiliated group [See Chapter 8].   This applies if the holding company or treasury center has at least one investment entity or passive NFFE and the income of the investment entity or passive NFFE in the group exceeds 50% of the group's aggregate income.4



SFFAs include assets not held in an account. Stocks and securities issued by a non-U.S. person that are held for investment are SFFAs whether they are held in an account with a FFI or not. The same holds true for capital or profits interests in a foreign partnership, any form of debt issued by a non-U.S. person, or a beneficial interest in a foreign trust, foreign estate, or foreign entity.  A litany of financial instruments collectively referred to as "swaps" are also SFFAs whether held in an account or not. Options and derivative instruments that have any non-U.S. parties or are issued by a non-U.S. issuer are also SFFAs.5

           Exemptions from SFFA Definitions

FATCA does provide exemptions. An interest in a foreign security or social insurance program is not a SFFA. A stock of precious metals held in a foreign safe deposit box is not a SFFA. Any security or partnership interest used or held in the conduct of normal trade or business is considered not to be held for investment under FATCA. Stock, however, cannot be considered to be held in the conduct of normal trade or business for purposes of FATCA. Therefore, foreign stock is a SFFA.6

Example of SFFA

To clarify what may be considered an SFFA, consider the following example. Mr. Smith, a U.S. person resident in the U.S., has $1 million in a Swiss bank account. He owns a partnership interest in a hedge fund established in the Cayman Islands, and directly owns 5,000 shares of a publically traded Japanese corporation, JapanCo. He also has social security benefits in a foreign country.

The Swiss bank account is an SFFA, as is his direct ownership in the Cayman Islands hedge fund, because it is a partnership interest not held in the conduct of normal trade or business.  Mr. Smith's shares of JapanCo stock is an SFFA, but his foreign country social security benefits are exempted.7


1. IRS Notice 2013-10, "Information Reporting by Domestic Entities under Section 6038D with Respect to Specified Foreign Financial Assets".

2. IRC §1471(d)(2), Treas Reg §1.1471-5(b)(1)(i), (ii).

3. IRC §1471(d)(2), Treas Reg §1.1471-5(b)(1)(iii)(A). "Investment entity" is defined in Treas Reg §1.1471-5(e)(4)(i).

4. IRC §1471(d)(2), Treas Reg §1.1471-5(b)(1)(iii)(B)(1). "Treasury center" is defined in Treas Reg §1.1471-5(e)(1)(v).

5. See generally IRS Form 8938, Statement of Specified Foreign Financial Assets.

6. See generally IRS Form 8938, Statement of Specified Foreign Financial Assets.

7. Foreign social security or social insurance programs are not specified as FFA, so they are not subject to FATCA reporting. Instructions to IRS Form 8938, Statement of Specified Foreign Financial Assets, p. 4.