Financial accounts maintained by a Foreign Financial Institution constitute one of the main categories of Specified Foreign Financial Assets that need to be reported on IRS Form 8938. While it seems trivial, it is important to understand what is meant by “Foreign Financial Institution” within the context of Form 8938 – i.e. what is the Form 8938 Definition of Foreign Financial Institution.
There are two parts of Foreign Financial Institution that need to be separately defined: “foreign” and “financial institution”.
Form 8938 Definition of Foreign Financial Institution: What is “Foreign”?
For the purposes of Form 8938, a financial institution is foreign if the financial institution is organized under the laws a of a jurisdiction other than United States and its territories. Thus, a domestic financial institution is the one that is organized under the laws of any of the 50 states of the United States, the district of Columbia, and US territories of American Samoa, Guam, the Northern Mariana Islands, Puerto Rico or US Virgin Islands – everything else is foreign.
It is important to note that a foreign financial institution is defined by the laws of a jurisdiction under which it was organized, not by where it operates. Thus, a domestic institution that operates overseas is not foreign.
Form 8938 Definition of Foreign Financial Institution: What is a “Financial Institution”?
Now that we were able to define the “foreign part of the Foreign Financial Institution, let’s turn our attention to the second part of this term – “financial institution”. This concept is defined broadly. In order for a Foreign Financial Institution to be considered a financial institution, it has to do one of the following:
1. Accept deposits in the ordinary course of a banking or similar business);
2. Hold financial assets for the account of others as a substantial part of its business; and
3. Engage (or holds itself out as being engaged) primarily in the business of investing, reinvesting, or trading in securities, partnership interests, commodities, or any interest (including a futures or forward contract or option) in such securities, partnership interests, or commodities.
This definition easily covers banks, credit unions, brokerages, various financial advisors, and everyone who is involved in any of the activities listed above. This even includes financial trusts.
Moreover, a foreign financial institution includes various investment vehicles such as foreign mutual funds, foreign hedge funds, and foreign private equity funds. It should be noted that these types of investment vehicles may also need to be reported on Form 8621 as PFICs.
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