2023 International Investment Overview and Required Filings
International Investment Overview and Required Filings:
Filing requirements are based on a taxpayer’s specific facts and need continual evaluation.
FinCEN Form 114 – Foreign Bank and Financial Account Reporting (FBAR):
Required by U.S. persons and entities to report non-U.S. financial accounts exceeding an aggregate of $10,000 USD at any time during the calendar year.
- What is a financial account? Bank, security, security derivatives and other financial instrument accounts, commodity futures, options, and insurance or annuity policies with a cash surrender value.
- What is not a financial account? Individual bonds, notes, or stock certificates held by the filer as well as unsecured loans to a foreign trade or business that is not a financial institution.
- Due date: April 15th, ext. October 15th
- Penalties start at $10,000
Form 8938 – Statement of Specified Foreign Financial Assets:
Required by U.S. individuals, businesses owned by U.S. individuals, and trusts with U.S. owners and/or beneficiaries if they own non-U.S. assets valued at more than $50,000 USD (depending on circumstances, the threshold may be higher). Assets include (1) depository or custodial accounts with a non-U.S. financial institution; (2) stocks or securities issued by foreign entities; (3) any other financial instrument or contract issued by a non-U.S. person; (4) any interest in a non-U.S. entity and (5) loans issued by filer to non-U.S. individuals or entities.
- Due date: April 15th, ext. October 15th
- Penalties: $10,000
Form 3520/3520-A – Foreign Trust Reporting Compliance:
Required by a U.S. person who makes a transfer to or receives a distribution from a foreign trust, who is considered the owner of foreign trust assets, or who received a gift from a foreign person during the year.
- Due date: April 15th/March 15th, ext. October 15th/September 15th
- Penalties start at $10,000
International Investment Overview and Required Filings (Continued): Form 5471 – Non-U.S. Corporate Reporting:
Required by certain U.S. persons who are shareholders, officers, or directors of certain non-U.S. corporations. Form 5471 has multiple schedules; a filer’s specific facts determine which schedules must be completed.
- Due date: April 15th, ext. October 15th
- Penalties start at $10,000
Form 8858 – Non-U.S. Business Reporting:
Required by U.S. persons who are owners of foreign disregarded entities or foreign branches. U.S. persons who earn non-U.S. rental income or who earn non-U.S. self- employment income may be considered to own a foreign branch.
- Due date: April 15th, ext. October 15th
- Penalties start at $10,000
Tax-Free Savings Accounts (TFSAs) and Registered Education Savings Plans (RESPs):
While these plans offer a great tax savings opportunity for Canadian purposes, the income earned in TFSAs and RESPs are not tax-free in the U.S. In addition, TFSAs may be considered foreign grantor trusts or foreign disregarded entities for U.S. purposes which would require Forms 3520/3520-A or Form 8858 to be filed to report the account each year. Individual circumstances vary as to whether there is a worldwide tax benefit to one of these accounts or if the U.S. tax consequences and additional administrative burden outweigh the Canadian tax savings.
Passive Foreign Investment Companies (PFICs):
PFIC status applies to non-U.S. companies with at least 75% of income from passive sources or at least 50% of assets that produce passive income. Common PFICs include non-U.S. mutual funds or exchange traded funds(ETFs), non-U.S. corporations owning real estate and non-U.S. holding companies. The PFIC rules, which are complex, often result in additional tax and interest in the U.S. In general, U.S. owners of PFICs must report income as it’s reported in the corporation, regardless of when distributions are made. Planning may be available to prevent being classified as a PFIC and to manage any additional U.S. tax liability. Failing to disclose a PFIC may result in penalties and the tax return being considered incomplete.
International Investment Overview and Required Filings (Continued):
Shareholders of Controlled Foreign Corporations (CFCs) and Corporate Ownership:
- GILTI: Global intangible low-taxed income (GILTI) is a U.S. tax provision that impacts 10%-or-more U.S. shareholders of controlled foreign corporations (CFCs). In general, U.S. shareholders of CFCs are subject to current taxation on income earned through a CFC in excess of a 10% return on the CFC’s tangible assets. For companies with little or no basis in tangible assets, essentially the entire net income could be subject to U.S. tax each year. Proactive planning is especially important for individual shareholders, as they are the most significantly impacted.
- Downward Attribution of Ownership: U.S. tax reform broadened the definition of constructive ownership for the purpose of determining if a non-U.S. corporation is a CFC by instating “downward attribution” of ownership. The general concept of downward attribution is an entity is deemed to constructively own other entities that are owned by its owners. As a result, many non-U.S. corporations that previously were not CFCs may now be treated as CFCs. If a corporation is a CFC, its U.S. shareholders are subject to disclosure requirements (Form 5471), as well as deemed income inclusions, such as the Subpart F and GILTI tax regimes.
Every situation is unique, consult a VSH tax advisor for more information.
