Pepper Hamilton LLP: Preparing to File Report of Foreign Financial Accounts by June 30, 2011

Pepper Hamilton LLP: Preparing to File Report of Foreign Financial Accounts by June 30, 2011

By Joan C. Arnold, Laura D. Warren, and  Paul D. Pellegrini  

By June 30, 2011, every U.S. person who owns or controls a foreign financial account must report those accounts to the IRS on form TD 90.22-1, (the FBAR form) if the value of the accounts totaled more than $10,000 at any time during calendar year 2010. Through new regulations issued earlier this year, significant changes have been made to the rules that define who has to file, with the most significant changes impacting individuals who have signature authority over accounts owned by their employers.

The charts below summarize the principal obligations and exemptions from filing. The charts are meant to provide general information and should not be taken as advice on or analysis of any particular situation. The first chart addresses obligations of individuals, other than those in a trust setting, the second addresses the obligation of entities, other than those in a trust setting, and the third chart addresses beneficiaries of trusts.

Common to each of the charts is the definition of a foreign financial account. A foreign financial account is:

(1) Located outside the U.S. It is the geographical location that is important. If, however, the maintenance of an account by a global custodian allows a person to access an account located outside the United States, it is a foreign financial account even if the global custodian is located in the United States.

(A) Example: A bank account in the New York branch of a non-U.S. bank is not a foreign financial account because it is not located outside the United States.

(2)One of the following types of accounts:

(A) a bank account, which includes a savings, demand, checking, or any other account maintained by a person in the business of banking

(B) a securities account, which includes any account with a person engaged in the business of buying, selling, holding, or trading stock or other securities

(C) an account with a person in the business of accepting deposits as a financial agency

(D) an insurance or annuity policy with a cash value

(E) an account with a broker or dealer for futures or options transactions in any commodity on, or subject to the rules of, a commodity exchange or association

(F) a mutual fund or similar pooled fund that issues shares available to the general public that have a regular net asset value determination and regular redemptions.

A foreign financial account does not include:

(1) ownership of an individual bond, note, or stock. If, however, those assets are held by a broker or other person in a securities account located outside the United States, it is a foreign financial account. In some jurisdictions a securities account or other bank account may have ownership of stock in a corporation that is a passive foreign investment company (PFIC) for U.S. tax purposes. For FBAR purposes the account that holds the PFIC stock is treated as a foreign financial account.

(2) investments in hedge funds, venture capital funds, and private equity funds because interests in those types of funds are not generally available to the public

(3) interests in a retirement plan that holds the account, or interests in an IRA that holds the account.

Additionally, reporting is generally not required for the following accounts:

(1) an account owned by a government entity

(2) an account owned by an international financial institution of which the United States is a member

(3) an account in a U.S. military banking facility (or U.S. military finance facility) operated by a U.S. financial institution designated by the U.S. government to serve U.S. government installations abroad

(4) a correspondent or nostro account that is maintained by a bank and used solely for bank-to-bank settlements.

CHART I

Individual

An FBAR Is Required if the Individual Meets the Following Requirements,
Except as Noted

I. The individual is either a U.S. citizen or a resident alien, and the requirements of II, III, IV, or V below are met.

(1) A U.S. citizen who resides outside the United States is not excused from filing an FBAR.

II. The individual is the owner of record (has legal title) to the account.1

(1) Example: An individual is listed as a joint owner on an account with her mother, who resides in the United Kingdom. The individual is the owner of the account and is obligated to file an FBAR.

III. The individual is the grantor of a trust, the individual is treated as an owner of the trust under the tax code's grantor trust rules, and the trust owns a foreign financial account.

IV. The individual owns, directly or indirectly, more than 50 percent (by vote or value) of the stock in a corporation, or profits or capital interest in a partnership (or an entity treated as a partnership), or any other entity, which owns a foreign financial account.

(1) Example: A U.S. citizen holds 100 percent of the interest in a U.S. LLC, which is treated as a disregarded entity for federal tax purposes. The U.S. LLC owns a foreign financial account. The individual has an FBAR reporting obligation, as does the LLC - see Chart II.

(2) Example: A U.S. citizen resides in Canada and owns more than 50 percent of the stock of a Canadian operating company. The operating company maintains bank accounts in Canada. The U.S. citizen has an FBAR reporting obligation with respect to the accounts.

V. The individual has signature authority over a foreign financial account that is owned by another person, except as noted in VI below.

(1) An individual has signature authority if the individual can control the account's assets through direct communication with the person maintaining the account, either on his own or in conjunction with others (when the person maintaining the account requires direct communication from more than one person regarding the disposition of assets in the account).

(A) Example: A U.S. citizen working for a multinational corporation has signature authority over a non-U.S. bank account of a non-U.S. subsidiary of a U.S. parent corporation. The U.S. citizen has an FBAR filing obligation. Note, however, in prior years if the U.S. parent corporation met certain requirements it could provide the employee with a statement that it had complied with its FBAR filing obligations, and that would relieve the U.S. citizen from having to file an FBAR. That exclusion has been eliminated for 2010, and the affected individuals are required to file an FBAR by June 30, 2011.

(B) Example: A U.S. citizen working for a U.K. subsidiary of a U.S. corporation has signature authority over U.K. bank accounts of the U.K. subsidiary. The U.S. citizen has an FBAR filing obligation as to the bank accounts.

(C) Example: Three U.S. citizens working for a U.S. corporation have signature authority over a foreign financial account of the U.S. corporation. The entity maintaining the account will not distribute funds from the account unless all three of the U.S. citizens sign a declaration permitting a distribution. Each of the U.S. citizens will have signature authority over the foreign financial account and, thus, will have an FBAR filing obligation as to the foreign financial account.

VI. An individual who does not own an account, but has signature authority over the account does not have to file an FBAR in the following circumstances:

(1) If the individual is employed by an entity that has stock (or ADRs) listed on any U.S. national securities exchange (a Parent), but only with respect to foreign financial accounts of the Parent. This rule does not excuse the individual from filing an FBAR with respect to a foreign financial account held by a subsidiary of the Parent, if the individual has signatory authority over the account, regardless of whether the Parent files a consolidated FBAR with the subsidiary. See Chart II for rules on the consolidated FBAR.

(2) If the individual is employed by a U.S. entity that is a subsidiary of a U.S. Parent (U.S. Subsidiary), and the U.S. Parent and the U.S. Subsidiary file a consolidated FBAR, the individual does not have to file an FBAR with respect to a foreign financial account of the U.S. Subsidiary. This rule does not excuse the individual from filing an FBAR with respect to a foreign financial account held by the U.S. Parent, a non-U.S. subsidiary, or another subsidiary of the U.S. Parent, if the individual has signatory authority over the account.

(3) The individual is an employee of one of the following:

(A) A bank that is examined by a federal banking agency.

(B) A financial institution that is registered with and examined by the SEC or CFTC.

(C) An entity that is registered with and examined by the SEC and provides services to an SEC-registered investment company (a registered investment advisor).


CHART II

Entity

An FBAR Is Required if the Entity Meets the Following Requirements, Except as Noted

I. The entity is a corporation, a partnership, an LLC, or a trust created, organized or formed in the United States, and the requirements of II, III, or IV below are met.

(1) An entity that is treated as a disregarded entity for federal tax purposes is NOT disregarded for this purpose. Thus, single-member LLCs, grantor trusts, and qualified Subchapter S subsidiaries are entities and are subject to the FBAR reporting rules.

(2) Example: A U.S. LLC is owned by a non-resident alien, and the LLC is the title holder of a foreign financial account. The LLC has an FBAR reporting obligation (assuming all other requirements are met).

II. The entity is an owner of record (has legal title) to the account.2

III. The entity is the grantor of a trust, the entity is treated as an owner of the trust under the tax code's grantor trust rules, and the trust owns a foreign financial account.

IV. The entity owns, directly or indirectly, more than 50 percent (by vote or value) of the stock of a corporation, or profits or capital interest of a partnership (or an entity treated as a partnership), or of any other entity, which owns a foreign financial account.

(1) Example: A U.S. corporation owns more than 50 percent of the stock of a Canadian operating company. The operating company maintains bank accounts in Canada. The U.S. corporation has FBAR reporting obligations with respect to the bank accounts.

V. Consolidated filings: A U.S. entity does not have to file an FBAR if another U.S. entity owns more than 50 percent of the entity and the other U.S. entity files a consolidated FBAR on behalf of itself and the entity.

(1) Example: A U.S. corporation owns a foreign financial account. The U.S. corporation is wholly-owned by a U.S. partnership, which owns several other foreign financial accounts. The U.S. partnership files a consolidated FBAR on behalf of itself and the U.S. corporation. The U.S. corporation does not have an FBAR reporting obligation.


CHART III

Beneficiary

An FBAR Is Required if the Beneficiary Meets the Following Requirements, Except as Noted

I. The beneficiary is either a U.S. citizen or a resident alien, or is a corporation, a partnership, an LLC, or a trust created, organized or formed in the United States, and the requirements of II below are met.

(1) A beneficiary that is treated as a disregarded entity for federal tax purposes is NOT disregarded for this purpose. Thus, single-member LLCs, grantor trusts, and qualified Subchapter S subsidiaries are entities and are subject to the FBAR reporting rules.

(2) Example: A U.S. LLC is owned by a non-resident alien, and the LLC is the beneficiary of a trust that owns a foreign financial account. The LLC has an FBAR reporting obligation (assuming all other requirements are met).

II. Either the beneficiary has a present beneficial interest in more than 50 percent of the assets held by a trust, or the beneficiary receives more than 50 percent of the current income of a trust.

(1) A beneficiary that is a discretionary beneficiary of a trust does not meet this requirement, and thus has no filing obligation.

(A) Example: A trust grantor may distribute 51 percent of the income of a trust to individual A. A does not have an FBAR reporting obligation.

(2) A beneficiary with a remainder interest in a trust does not meet this requirement, and thus has no filing obligation.

(A) Example: A trust will terminate upon the death of the grantor. Upon the trust's termination, 80 percent of the trust's assets will be distributed to A and the remaining 20 percent of the trust's assets will be distributed to B. If either A or B is not living at the time the trust terminates, then the remainder of the trust's assets will be distributed to individual C. A has an FBAR reporting obligation. Neither B nor C have an FBAR reporting obligation.

III. Filings on behalf of a beneficiary: A beneficiary does not have to file an FBAR if a U.S. trust, U.S. trustee, or U.S. agent of the trust files an FBAR for the trust's foreign accounts.

(1) Consolidated filings: A beneficiary does not have to file an FBAR if a U.S. entity owns more than 50 percent of the beneficiary and the other U.S. entity files a consolidated FBAR on behalf of itself and the beneficiary.

Endnotes

1 An individual that creates an entity and transfers ownership of a foreign financial account to the entity to avoid having to report the foreign financial account on an FBAR will be deemed to own the foreign financial account. For example, assume individual A owns a foreign financial account. A creates Corporation B and transfers the account to Corporation B. A transfers 50 percent of the stock of Corporation B to his son. A's intent is to avoid having to file the FBAR. In this case, A will be deemed to own the account and, consequently, will have to file an FBAR.

2 An entity that creates another entity and transfers ownership of a foreign financial account to the new entity to avoid having to report the foreign financial account on an FBAR will be deemed to own the foreign financial account.

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.

This article is republished with permission of Pepper Hamilton LLP. Further duplication without the permission of Pepper Hamilton LLP is prohibited. All rights reserved.

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