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International Tax Issues for the Domestic Estate Planner

By

N. Todd Angkatavanich, Esq.

Edward A. Vergara, Esq.

Andrea Zakko, Esq.

IRS required statementThis written advice was not intended or prepared to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer.

2

The Internationally Connected Client

Increasing investment by foreign persons in U.S. assets

International families with cross-border connections, including spouses,

children and businesses

Non-resident non-citizens (otherwise known as “non-resident aliens” or

“NRAs”) increasingly look to the U.S. as a safe haven

• Correct U.S. structuring can minimize tax and provide legitimacy

Knowledge of the rules can avoid traps for the unwary

Increased international financial transparency mandates correct U.S. and

non-U.S. structuring

3

International Triage

Three preliminary questions:

• Who is subject to the US Federal estate, gift, generation

skipping transfer (“GST”) and income taxes?

• Which assets and income are subject to the taxes?

• Is there a treaty that overrides the U.S. tax principles?

4

Who is Subject to the Estate, Gift, and GST Taxes?

These three types of taxes can be imposed on gratuitous

transfers of property

But they only apply if the testator or donor:

• Is a US citizen;

• Is a US domiciliary for estate, gift, and GST tax purposes

(different than “residency” for Federal income tax

purposes); OR

• Is a non-citizen/non-domiciliary who transfers certain

assets that are situated in the US

5

Domiciliaries – Subject to U.S. Transfer Taxes

Two requirements for domicile, Treas. Reg. 25.2501-1(b):

• Living in a place, even for a brief period of time

• No definite present intention of leaving the place

Difficulty in determining intent

Courts look to many factors (highly subjective):

• Location of residences, expensive possessions and investments

• Relative amount of time spent at claimed domicile and in other countries

• Location of family and friends

• Location of church, business activities and club memberships

• Jurisdiction of voter’s registration and driver’s license

• Declarations or statements of residence or intent (visa applications, wills, trusts,

letters, oral statements, tax returns, etc.)

• Case law indicates holding green card is not determinative

6

Who is Subject to U.S. Income Taxes?

Three types of persons are subject to U.S. income tax:

• U.S. citizens

• U.S. residents

• An NRA, but only on U.S. source portfolio type income or net income effectively connected income with a US trade or business

7

Citizens – Subject to U.S. Transfer Taxes and Income Tax

Typical ways to obtain U.S. citizenship (no passport needed):

• Birth within the U.S.

• Birth outside of the U.S. to at least one U.S. parent (subject to

certain additional requirements depending on DOB)

• Naturalization

Important to ask clients about their citizenship and the citizenship

of their family members

8

Residents – Subject to U.S. Income Taxes

Ways to be a resident:

Green card holder (determinative)

First year election to be treated as a resident under §7701(b)(4)

Spousal election under § 6013(g)

Satisfaction of the Substantial Presence Test under §7701(b)(3)

• Presence in the U.S. for at least 31 days in the test year, and

• Day count: current year days + 1/3 of prior year days + 1/6 of second prior year days >= 183 days

• Certain days do not count

• “Closer Connection” exception under § 7701(b)(3)(B)

9

Estate Taxation of NRAs – Overview

Gross Estate

Situs Rules

Deductions

Credits

10

Estate Taxation of NRAs – Gross Estate

Gross estate of an NRA includes only assets situated in the U.S.,

§2103

Transfers where §§ 2035 – 2038 are applicable will trigger inclusion in

the NRA’s gross estate if the assets are U.S. situs assets at the time

of the transfer or at the NRA’s death, § 2104(b)

• Planning note: Do not mix U.S. situs assets with non-U.S. situs assets,

and consider carefully retaining “strings” in trusts

Jointly Owned Property – based on actual contributions of joint owners

11

Estate Taxation of NRAs – Situs Rules

Real Property

Real Property Interests

Tangible Personal Property – situated where located Includes currency, jewelry, furnishings, clothing, collectibles

Exceptions for certain artwork on loan to a public facility, on exhibition or in transit to or from an exhibition

Exception for “in transit” tangibles, Delaney v. Murchie, 177 F.2d 444 (1st Cir., 1949)

Intangible Personal Property includes U.S. corporate stock, partnership interests, interests in trusts,

life insurance proceeds, mutual funds and debt obligations

12

Debt Obligations Generally

• Debt obligations are U.S. situs if the primary obligor is a U.S. person under

§7701(a)(30)

Exceptions swallow the rule (mostly)

• Certain bank deposits

Deposits and CDs with a U.S. bank (but not brokerage house)

Deposits with a foreign branch of a U.S. commercial bank

Deposits in a U.S. branch of a foreign commercial bank

• Certain OID instruments

• Portfolio debt

Estate Taxation of NRAs – Situs Rules – Debt Obligations

13

Hold assets with U.S. situs (or assets where situs is in

question) in a foreign corporation to avoid estate tax — can

create income tax issues

• FIRPTA issues if real property is involved

• ECI or § 367 issues if U.S. trade or business property is

involved

Estate Taxation of NRAs – Situs Rules – Planning Notes

14

Estate Taxation of NRAs – Deductions

Deduction for Expenses

• Deductions are allocated pro rata, based on ratio of U.S. assets to non-U.S. assets

• Generally requires disclosure of worldwide assets on Form 706, otherwise lose the deduction

• No deductions for debts or expenses associated with property not situated in the U.S.

15

Estate Taxation of NRAs – Deductions

Deduction for Debts

•Recourse debt – allocated pro rata, based on ratio of U.S. assets to non-U.S.

assets

•Non-Recourse debt – full offset so only net equity is included in the NRA’s gross

estate

•Example: NRA’s only U.S. property is an apartment in NY worth $5 million,

subject to a recourse mortgage of $4 million. NRA has $15 million of non-U.S.

property. Value includible in NRA’s estate is $5 million gross minus $1 million

allocation of the recourse mortgage, or $4 million. This $4 million is $3 million more

than the net equity in the NY residence. The $1 million allocation of recourse

mortgage is calculated as follows:

$4 million x $5 million gross estate situated in US = $1 million

$20 million worldwide gross estate

16

Estate Taxation of NRAs – Deductions

Marital Deduction

• Only allowed for the proportion of U.S. situs assets passing to the

surviving spouse (disclosure required)

• If surviving spouse is a U.S. citizen, there is an unlimited marital

deduction

• If surviving spouse is not a U.S. citizen, property must pass to a

Qualified Domestic Trust (QDOT) or surviving spouse must form a

QDOT or must become a citizen before the filing of Form 706

17

True credit of $13,000 (equivalent of ~$60,000 exemption) OR possible treaty option for pro rata amount of applicable exclusion amount available to U.S. citizens and residents (based on proportion of U.S. situs assets)

If they have the option, NRAs often choose the $13,000 credit to avoid disclosure

If no treaty option is available, consider arguing that the decedent was a U.S. domiciliary if assets are mostly U.S. situs (Estate of Kahn)

Estate Taxation of NRAs – Credits or Exemptions

18

Gift Taxation on Transfers by NRAs - Overview

Situs Rules

Credits and exclusions

Deductions

19

Property subject to gift tax

• Real and tangible personal property situated in the US

• Gift by check? PLR 8210055

Gifts of U.S. intangible property are not subject to gift tax under

§2501(a)(2)

• Debt obligations of a US person

• Stock of US corporations

Planning Point - Better to gift U.S. intangibles during life (gift

tax-free) because if held until death they will be included in the

estate of a non-domiciliary

Gift Taxation on Transfers by NRAs - Situs Rules

20

Gift Taxation on Transfers by NRAs – Credits and Exclusions

No unified credit available

Annual exclusion allowed ($14,000 for 2015)

No gift splitting unless both spouses are U.S.

citizens

21

Gift Taxation on Transfers by NRAs – Deductions

Charitable deduction allowed for gifts to U.S. charities or trust

using assets in the U.S.

Limited marital deduction for gifts to non-citizen spouses,

§2523(i)

• No lifetime QDOT available

• Expanded annual exclusion for present interest gifts is

available ($147,000 in 2015)

22

GST Tax on Transfers by NRAs

Direct Skips – Subject to GST tax only to the extent that the transfer is

subject to estate or gift tax

Taxable Distribution or Taxable Termination – Subject to GST tax only

to the extent that the initial transfer by the NRA to the trust was

subject to estate or gift tax

GST Exemption – Same as for U.S. citizens and residents ($5.43

million for 2015)

Automatic exemption allocation rules apply

Tax is imposed at the highest rate in effect at the time of the transfer

(i.e. no marginal rates)

23

Which assets are subject to the GST tax?

Situs rules at time of transfer control

• A transfer by a non-domiciliary transferor is a “Direct Skip” subject to

GST Tax only to the extent that the transfer is subject to Federal estate

or gift tax (Treas. Reg. §26.2663-2(b)(1))

• The GST Tax applies to a “Taxable Distribution” or a “Taxable

Termination” to the extent that transfers of property to the trust were

subject to Federal estate or gift tax (Treas. Reg. §26.2663-2(b)(2))

Planning Opportunities / “Remaining Out of the Net”

• Gifts of US situs intangibles avoid GST Tax in addition to gift tax and

estate tax

• Generally, as long as there is no estate or gift tax on transfers into the

trust, there is no GST Tax on transfers out of the trust

24

Treaty Protections

U.S. has numerous bilateral estate tax treaties with foreign

countries

Treaty provisions in general override U.S. tax law unless U.S.

tax law enacted after treaty was signed to override treaty

provisions

Bilateral transfer tax treaties generally allow taxation of

intangibles only to country of transferor’s residence

Bilateral transfer tax treaties generally allow tax credit to

transferor in host country for taxes payable to country where

property transfer is taxed to non-domiciliaries

25

US Estate Tax ExposureNon-US Citizen Spouse – Transfers at Death

Transfers to non-US citizen spouse estate taxable unless transfer into Qualified

Domestic Trust (‘QDOT’) (§2056A)

• Timely Election Must be Made

• Income Automatically Payable Only to Surviving Spouse

• Principal Payable Only to Surviving Spouse During Lifetime

• Payout of Principal attracts US Estate Tax Charge

• Principal Remaining at Spouse’s Death subject to US Estate Tax

• Must Have One ‘US Trustee’ with the power to withhold the tax imposed on distributions from a QDOT – if assets > $2 million must be a bank or must furnish bond or letter of credit

• Surviving non-US citizen spouse can “self-settle” a QDOT before the filing date of the decedent’s US estate tax return (§2056(d)(2)(B))

• Taxed as part of decedent spouse’s estate

26

US Estate and Gift Tax Exposure Non-US Citizen Spouse

Jointly Owned Property – Trap for the Unwary

‘Consideration Provided Rule’ (§2040(a)) - Full value of property

included in the US decedent's estate, except to the extent that

estate proves consideration was provided by surviving non-US

citizen spouse

Depends on Type of Property

Real Estate – Generally no deemed gift on creation of joint

tenancy. May have estate tax consequences. Gift upon

sale or severance if proceeds are divided

Joint Accounts – Generally deemed gift on purchase of joint

property (if non-contributing spouse can “sever” the joint

tenancy under applicable law)

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Income Taxation of NRAs U.S. Source Fixed or Determinable, Annual or Periodical (“FDAP”) income

• Includes U.S. source interest, dividends, rents, salaries, wages,

annuities and debts

• Generally does not include interest on portfolio debt

• 30% withholding on FDAP, subject to treaty benefits

Income “effectively connected” to a U.S. trade or business (“ECI”)

• Income derived from a U.S. trade or business

• Generally taxed on a net basis, at regular graduated rates

• Treaty benefits may be available

• FIRPTA

Generally not subject to tax on capital gains (unless effectively connected

with a U.S. trade or business or FIRPTA asset)

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FDAP

Subject to a flat 30% gross tax unless reduced by treaty

No deductions

Typically satisfied through withholding at source

Includes dividends, rents, royalties and other investment income

Note: virtually all capital gains are excluded and interest income is rarely

taxed as FDAP (due to portfolio and bank interest exceptions as well as

relevant treaty provisions).

However: an additional withholding tax may apply to FDAP income or the

gross proceeds upon the sale or disposition of FDAP producing assets unless

certain additional reporting requirements are met under the FATCA provisions

beginning July 1, 2014.

29

Effectively Connected Income

ECI – Net tax at graduated rates applicable to individuals,

trusts or corporations

Requires a foreign person to have a US trade or business

(USTB)

Only income effectively connected to the USTB is taxed

Deductions and credits available against ECI only if a tax

return is timely filed (subject to a good faith exception)

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FIRPTA – Foreign Investment in Real Property Tax Act

Enacted in 1980 to eliminate the perceived tax advantage of foreigners purchasing U.S.

real property over U.S. taxpayers

FIRPTA applies to U.S. real property interests, other than interests held solely as a

creditor (“USRPI”)

• Also applies to U.S. real property holding corporations (“USRPHC”) if more than

50% of the FMV of the corporation over 5 years is USRPI

• Certain exceptions to USRPHC: publicly traded companies, certain REITs, etc.

Gain on the disposition of USRPI is treated as ECI

• Must file a U.S. income tax return and pay tax on a net basis at graduated rates

• Transferee must withhold 10% of gross sale proceeds (including transferred

liabilities), unless an exception applies

31

Trust Status in International Planning

Foreign or Domestic

Grantor or Non-Grantor

Taxation of trust and beneficiaries is dependent on

both characteristics

32

“Foreign Trust”

A trust is a “Foreign Trust” (§7701(a)(31)) unless:

• A Court within US exercises primary supervision over

administration of the trust (the “Court Test”); and

• One or more US persons have authority to control all

substantial decisions of the trust (the “Control Test”)

Watch special power of appointment holders, protectors

* If you fail either test then have a Foreign Trust

33

Taxation of Foreign Non-Grantor Trusts

Income taxation of the trust

Taxed as if the trust were an NRA under income tax rules

Difference in treatment of capital gains if accumulated

Income taxation of NRA beneficiaries

Trust is a conduit, so all items of income are carried out with the

same character to each beneficiary, pro rata

34

Taxation of Foreign Non-Grantor Trusts

Income taxation of U.S. beneficiaries

• Distributions carry out DNI; DNI includes capital gains

• Distributions in excess of DNI (“UNI”) are subject to the

“throwback rules”

• Accumulated long-term capital gain income and dividend

income are taxed at ordinary rates when distributed

65-day rule for distribution planning

35

Foreign Non-Grantor Trusts – Distributions to U.S. Beneficiaries

Indirect Distributions

• Indirect distributions are treated as if they were made directly from the foreign

trust to the U.S. beneficiary, if for the principal purpose of tax avoidance

(conduit rules)

Use of Property

• Use of personal property (residences, jewelry, artwork) is deemed to be a

distribution at market value of use unless rented for fair rental value

Loans to a U.S. Person

• Loans of cash or securities to a U.S. beneficiary, U.S. grantor or U.S. persons

related or subordinate to the beneficiary or grantor are treated as distributions

• Exception for loans satisfying certain requirements of IRS Notice 97-34 and

regulations (qualified obligations)

36

Throwback Rules

Throwback rules apply whenever a distribution of accumulated income

from a prior year (UNI) is made in excess of the current year’s DNI

Draconian rules aimed to recapture tax that was deferred offshore

• Prior accumulations all treated as ordinary income

• Capital gains and dividends lose character and are taxed as ordinary

income

• Interest charge based on accumulated income from past years

“thrown back” to year of accumulation on a FIFO basis

37

Foreign Non-Grantor Trust Accumulation Distribution Planning

Avoid throwback rules by:

• Distribute DNI currently

• Structure Trust to qualify for “3 gift rule”

• Using Total Return Trust – Manipulate FAI vs. DNI

• Using offshore Private Placement Variable Universal Life (“PPVUL”)

• “Carve-off” undistributed net income (“UNI”) to a new foreign trust and the

remainder of the trust can make distributions to US beneficiaries

• “Default Method” three year rolling average

• Migrate Trust to US

38

Grantor Trust Status for Foreign Grantors

Section 672(f) - special grantor trust rules apply to trusts with non-U.S. grantors

For non-U.S. grantors, there are generally two ways to create “Grantor Trust” status:

• The grantor has the power to revest the property in himself – can require the consent of a related or subordinate party subservient to grantor (power of revocation), or

• Distribution of income or principal can only be made during the grantor’s lifetime to the grantor or the grantor’s spouse

39

Taxation of Foreign Grantor Trusts - Planning Opportunities

If Section 672(f) requirements are satisfied, substantial opportunities for efficient

income tax planning for foreign grantors of trusts with US beneficiaries

All income is deemed taxable income of foreign grantor – US beneficiaries can

receive distributions free of tax

Foreign grantor only taxed on ECI or US source FDAP, so trust can invest in the

US and generate capital gains (excluding FIRPTA gains) and interest income, as

well as non-US income, without incurring an income tax burden in the US

Can be US transfer tax free if properly structured

Planning necessary with respect to estate and income tax consequences

following grantor’s death

Need to understand taxation of grantor in grantor’s jurisdiction

40

Planning when Foreign Grantor Dies

Benefits of Foreign Grantor Trust cease when Grantor dies;

trust becomes a Foreign Non-Grantor Trust

Plan to avoid the Throwback Rules and reporting

requirements

• Purge DNI each year (outright or to a “mirror” foreign or U.S.

trust)

• Domesticate the foreign trust

41

Overview of Tax Hurdles

Historic Deferral Opportunities

• Foreign holding companies

• Foreign trusts

Section 679 for U.S. grantors of certain foreign trusts

Section 684 for transfers by U.S. persons to foreign non-grantor trusts

Anti-Deferral for foreign holding companies – CFCs and PFICs

42

Section 679 – Foreign Grantor Trusts - U.S. Grantor

U.S. person who transfers property to a foreign trust will be treated as the income tax owner of the portion of the trust attributable to that property if:

the trust is an inter vivos trust; and

there is a current, future or contingent U.S. beneficiary of any portion of the trust

Trust agreement should specifically identify class of persons who can receive distributions

Presumption of a U.S. beneficiary for new trusts unless information is submitted to the IRS

Five year look-back period for transfers in trust by a foreign grantor who then becomes a U.S. person if foreign trust has U.S. beneficiaries

43

Section 679 – Foreign Grantor Trusts - U.S. Grantor

Section 679 creates potential traps for the unwary

• Loans of cash or securities by a U.S. person to a foreign trust with

U.S. beneficiaries is treated as a contribution, triggering grantor

trust status unless qualified obligation is used

• Loss of grantor trust status (e.g. no more U.S. beneficiaries) under

Section 679 would trigger Section 684 mark to market taxation

44

Section 684 – Transfers by U.S. Persons to Foreign Non-Grantor Trusts

A U.S. person must recognize gain (but not loss) on transferring property to a

foreign trust unless the transferor is treated as the owner of the trust for grantor

trust purposes

• Indirect transfers through certain third parties

• Constructive transfers – paying or assuming an obligation of the trust, or

certain guarantees of an obligation of the trust

Applies only if a U.S. person is not treated as the owner of the foreign trust

Does not apply to assets passing at death that are includible in the transferor’s

estate

45

Foreign Holding Companies

Controlled Foreign Corporations (CFCs)

• CFC is a (i) foreign corporation where (ii) U.S. shareholders have

more than 50% by vote or value, (iii) with each U.S. shareholder each

owning at least 10% of the vote

• Controlling shareholders are taxed on (i) Subpart F income which

includes (ii) passive income, even if not distributed from the CFC to

the shareholder

• Subpart F income, generally, is income from the CFC's nonoperating

or passive assets or certain income derived with respect to

related party transactions

• Reporting Requirements

46

Foreign Holding Companies

Passive Foreign Investment Companies (PFICs)

• PFIC is a foreign corporation where (i) 75% or more of its gross income for

a taxable year is passive income, or (ii) 50% or more of its assets produce

or are held for production of passive income

• Taxation occurs only on actual distributions or dispositions absent a

Qualified Electing Fund

• Draconian rules on “excess distributions” and upon disposition of PFIC

shares: (i) subject to an interest charge and (ii) treated as ordinary income,

regardless of underlying character in a manner similar to foreign non-

grantor trust distributions

• Reporting Requirements

CFC rules trump if a company is both a CFC and a PFIC

47

Typical Structure – During Grantor’s Life

Foreign holding company avoids U.S. estate tax

Foreign grantor trust (with a foreign grantor) avoids PFIC and CFC issues

NRA Grantor

Foreign Grantor Trust (may have

U.S. beneficiaries)

Foreign Holding

Company

Underlying Assets(may be U.S. situs)

48

Typical Structure – After Grantor’s Death

Foreign holding company may be

treated as a PFIC or CFC

Use of check-the-box elections after

the death of the NRA foreign grantor

Can be used retroactively up to at

least 75 days before filing date

Careful of U.S. situs assets

Foreign Non-Grantor Trust may be

subject to Throwback rules

Purge trust of DNI each year or

domesticate the trust

Foreign Non-Grantor Trust

(may haveU.S. beneficiaries)

Foreign Holding

Company

Underlying Assets(may be U.S. situs)

49

Income Tax Basis Issues

Rules for step up in basis may not apply to non-domiciliary

decedent's estate when property is held in trust unless

property is subject to U.S. estate tax

Foreign trusts when property not subject to U.S. estate tax

at grantor’s death need special provisions to allow asset

basis step-up

Foreign trusts must be revocable (or amendable,

terminable) and decedent must have right to receive or

control payment of income during lifetime

Testamentary general powers of appointment can also be

exercised

50

Income Tax Basis Issues – CFCs and PFICs

CFCs may receive step-up in basis but need to liquidate

within 30 days after death

PFICs may not receive step-up in basis

PFIC/CFC overlap rule for entities held prior to 1998

51

Pre-Immigration Planning

Basis step-up through asset churning prior to establishment of

U.S. income tax residency

Drop-off foreign trust planning for estate/gift/GST tax

protection prior to establishment of U.S. transfer tax domicile

Section 679 can pull income from trusts into U.S. person’s tax

base if foreign trust formed within 5 years of U.S. residency

Use of deferred variable annuity and private placement

variable life insurance to “wrap” income

52

Section 877A applicable to certain persons expatriating or relinquishing long-term U.S. residency after June 16, 2008

Old rules may still apply

Who is subject to the rules? “Covered Expatriates”

US citizens and “long term” green card holders (8 out of 15 tax years) who meet one of the following tests:

(i) Net Worth Test

(ii) Income Tax Liability Test; or

(iii) Failure to certify tax compliance

For green card holders, tax year requirement includes partial years (e.g., 6 years and 2 days could constitute 8 years)

Two exceptions: (i) certain minors before age 18½ and (ii) certain dual citizens

Re-entry into U.S.

Expatriation Regime

53

Expatriation Regime - Taxation of Covered Expatriates

Exit Tax or “Mark-to-Market” Tax

Deemed sale of worldwide property for its fair market value on the date prior to the expatriation, with an exclusion of $600,000 of gain, indexed for inflation ($690,000 in 2015)

Lingering U.S. Tax Effects of Expatriation:

30% withholding tax on distributions from: (i) certain deferred compensation arrangements and (ii) trusts that are non-grantor trusts immediately before expatriation

The U.S. donee (including U.S. trusts) of any gift or bequest from a covered expatriate is responsible for U.S. transfer tax at highest marginal rates (currently 40%).

Exceptions for annual exclusion gifts, gifts to qualified charities or gifts to a U.S. spouse

54

Reporting Requirements

Form 3520 – Transfers involving foreign persons and foreign trusts

Form 3520-A – Foreign trust annual reporting

Form 8621 – PFIC ownership

Form 5471 – CFC ownership

Form 8865 – Foreign Partnerships ownership

Form 8858 – Foreign single member disregarded entities ownership

Form 8938 – Foreign Financial Assets

FinCEN Report 114 (“FBAR”)

55

Form 3520 – Foreign Gifts and Trusts Required to be filed by any U.S. person (or the estate of a U.S. person) who:

• Received a gift of more than $100,000 from an NRA;

• Received more than $15,358 (in 2014) or $15,601 (in 2015) of gifts from foreign corporations and partnerships;

• Received a distribution from any foreign trust or estate;

• Created or funded a foreign trust;

• Is treated as the owner of any foreign trust under Sections 671 through 679; or

• Dies as the owner of a foreign trust or with assets of the foreign trust includible in his estate.

Due on the same due date as income tax return, with extensions

Minimum $10,000 penalty for the failure to file or incorrect filing

• If greater, the penalty will be 35% of the property transferred to trust, 35% of the value of distributions received from a foreign trust, or 5% of the value of any trust treated as owned by the U.S. person

56

Form 3520-A – Annual Reporting of Foreign Trusts with U.S. Grantors

Required to be filed by the trustee of a foreign trust that has a

U.S. owner for grantor trust purposes

Disclosure of trust income during the year

Due date of March 15

Penalty for failure to file or an incorrect filing is the greater of

$10,000 or 5% of the gross value of the portion treated as owned

by the U.S. person

57

Forms 5471, 8621, 8858 and 8865

Due on the same due date as income tax return, with extensions

Minimum $10,000 penalty for each failure to file or late filing plus loss of certain foreign tax credits

Form 5471 (CFC): Required to be filed by a U.S. person who controls, transacts with or has certain relationships with the CFC

Form 8621 (PFIC): Required to be filed by a U.S. person who is a direct or indirect shareholder of a PFIC in each tax year where he (i) receives a distribution (ii) disposes of the PFIC stock or (iii) is making certain elections relating to the PFIC

Form 8858 (U.S. Owned Foreign Single Member Disregarded Entities): Generally created with foreign entity check the box election

Form 8865 (Foreign Partnerships): Required to be filed by a U.S. person who is a 10% partner (measured by capital or profit share) of the foreign partnership

58

Form 8938 – Foreign Financial Assets

Any U.S. person with an interest in “specified foreign financial assets” must file, if the value of those assets exceeds a certain threshold

Broad definition of foreign financial assets, including interests in certain foreign trusts

Threshold varies from $75,000 to $600,000 depending on residence and filing status

Currently only individual filing is required; anticipated regulations on filings required by U.S. entities and trusts so filings by non-individuals still not required

Due on the same due date as income tax return, with extensions

Minimum $10,000 penalty for each failure to file or late filing

No duplicative reporting is required if information is reported on Form 3520, Form 8621, Form 5471 or Form 8865

59

FinCEN Report 114 - FBAR

U.S. owners with beneficial interests in, or signature authority

over, foreign bank accounts must file an FBAR if aggregate

value of the accounts exceeds $10,000 at any time in the

calendar year

• FBAR requires disclosure of the highest balance in the

year

Due on June 30 of the year following any year in which a filing is

required (with no mailbox rule)

Electronic filing requirement

60

N. Todd Angkatavanich

203-974-0398

todd.angkatavanich@withersworldwide.com

Edward A. Vergara

203-302-4074edward.vergara@withersworldwide.com

Andrea Zakko

203-974-0408andrea.zakko@withersworldwide.com

Withers Bergman LLPwww.withersworldwide.com

660 Steamboat Road 157 Church Street 1st Floor 12th FloorGreenwich, CT 06830 New Haven, CT 06510