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Determination of Whether a Business Entity Exists | FACC Seminar October 19 2017

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The question of a Business Entity actually involves a complex analysis and I lay out some of it here; it is a very simplified analysis but basically the very first question that we have to ask is: Is there a Business Entity?

I’m going to jump to the point 1b right away. Suppose that ‘Pierre’ a French National and let’s say ‘John’ a US National come together in Paris over a glass of wine and they decide: ‘You know what? Why don’t we sell product X on the streets of Paris? We’re going to sell it together; then divide it up – profits and that’s it. Each of us will report it on the French Tax Return: our share of profit and that’s it.’

Did they create an entity? Or let’s put it this way: Do you think they created an entity under French Law? Audience member answer: ‘No.’ Most likely, No. French Law is a civil law system; they wouldn’t apply the Common Law Partnership concept.

But US Law would and when it comes to determining whether there is or there isn’t a business entity in existence, it’s the US Federal Law that will dominate. We always go to US Federal Law to determine whether there is identity or not and probably in this case they created a Common Law Partnership which means they have created a Partnership for tax purposes which I will explain the difference in a second.

The second question that we have to ask is: Is this a Business Entity or Trust? I’m not going to spend much time on it because it’s a huge topic, but one thing I will mention here just so that I know that some of you may have clients or deal with investment trusts outside of the United States if an Investment Trust happens to have one class of beneficiaries, most likely it is a Trust. If it has more than one class of beneficiaries, most likely it is a Corporation.

International Tax Lawyers Indianapolis | Default Classification of Foreign Businesses

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Once we decide that this is a business entity, then our next question we have to ask is: What type of an entity is it?

There are three choices available when it comes to US International Tax Law:

a Corporation

a Partnership or

a Disregarded Entity

The equivalent here of a Disregarded Entity is precisely this; in the United States, a single member LLC would be considered a Disregarded Entity. It doesn’t exist for tax purposes. There’s only taxpayer; there’s nothing else.

For legal purposes there is an LLC, but for tax purposes there isn’t. To be honest with you, it’s really hard to find a Disregarded Entity outside of the United States for US Tax Purposes unless someone makes a specific election to do so. We’ll talk about that election in a second. But what I want to do is I want to give you sort of two examples from France and I’d like you to tell me if this is a Partnership, a Corporation or a Disregarded Entity.

Let’s talk about Societe Civile; Societe Civile is a noncommercial partnership. (I took the definitions off their website; so it’s interesting for our purposes here.) “Heavily formed by members of the Professions Liberale – so farmers or those engaged in so-called intellectual activities including, writers, researchers or any type of consultant.” A Societe Civile can elect to pay corporate tax or not; so it may pay or it may not pay. If not, each Shareholder will include the portion of the entity’s profits or losses on his personal tax return.

Is this a Partnership or a Corporation or Impossible to Tell at this point based on what I said? Does anyone want to guess? (Member of audience guess) “It’s impossible to tell.”

Why? Well, let’s hold off on this one and talk about the second one.

A Societe a Responsibilitie Limitee a SARL which is a very very common Entity and it’s also very common for US Taxpayers who come to France when they want to form some kind of business will usually open up a SARL. So a SARL must have between 2 to 50 Shareholders and a Managing Director who is usually paid a salary. A SARL can elect under circumstances to pay Corporate Tax rather than having its income included on the Director’s personal income tax declaration. Corporation Partnership, Impossible To Tell? Corporation? Why do you think so? (inaudible answer)

Okay, okay, but now remember we’re dealing with US International Tax Law; so just because an Entity is classified as a Corporation under Local Law does not in any way mean that it would be a Corporation under US Law. That’s an important point to remember. The answer to both is: it is impossible to tell because I didn’t give you the most important piece of information.

And actually the only one that really matters: Limited Liability. I didn’t say in either case whether the owners, the members of each entity had Limited Liability. This is the only test that matters. If all members of a Foreign Entity have Limited Liability, it is a Corporation. If at least one of them does not; it’s a Partnership as long as there are more than two members of/in the company.

If there is One Member and there is no Limited Liability it’s basically a Disregarded Entity. So it all hinges on the issue of Limited Liability.

International Tax Lawyers Colorado Springs | Definition of Limited Liability

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The question is: What is a Limited Liability? It is important to understand that a Limited Liability is a situation where a member has no personal liability for the debts of or claims against the entity by the reason of being a member.

The determination of Limited Liability is made based on the local law; so even though the general framework, whether a company is a corporation or a partnership, is determined by US Law. The very fact, the most important factor of whether a person/member has Limited Liability or not is determined by local law. So in this case it would be French Law.

Comment: ‘So you are saying that this is what the IRS code says?’ Exactly! These are straight from the regulations.

Do you think organizational documents would matter.. of the company? Answer: ‘Yes’. Partially, yes; as long as local law says that: yes, it is possible for the entity and its organizational documents to assign Limited Liability or to remove Limited Liability from the member.

International Tax Attorney Edina | Per Se Corporations

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There is one important exception to this rule: Per Se Corporations.

The IRS publishes a list of Per Se Corporations per country. There can be only one choice for this corporation; it was always a corporation, nothing else; this entity will always be a corporation.

In France a Societe a Limitee is a SA; in Canada it would be a company or a corporation. If either name appears in the title of the entity, it would be a corporation.

Assurance Vie US Tax Compliance | FBAR FATCA Tax Lawyer

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Hello and welcome to Sherayzen Law Office Video blog. My name is Eugene Sherayzen and I’m an international tax attorney.

Today we’re doing a video from Milwaukee, Wisconsin and I was just walking on the streets and I heard French being spoken by two gentlemen, and it put me to mind about Assurance Vie Accounts.

Assurance Vie Accounts are a very common investment in France. Virtually everyone in the French middle class has them. But whenever a French citizen comes to the United States he runs into various problems with respect to reporting the Assurance Vie Accounts.

For example, a lot of Frenchmen do not know that once they become US Tax Residents they are required to report Assurance Vie Accounts on FBARs and if they meet the Form 8938 threshold, they will also be required to report them on forms 8938.

The second problem which is very common with French people who come to the United States is the issue of reporting income from the Assurance Vie Accounts. As you may already know, the income on the Assurance Vie Accounts is not taxable in France; however, it is taxable in the United States and most of Assurance Vie Accounts consist of two parts.

The first part is the investments; investments, usually in foreign mutual funds. The second part of Assurance Vie Accounts consists of the Euro-fund part and basically this is cash that is sitting in the account and just accumulates interest.

Now the interest is calculated under the specific rules which are associated with these Euro capital, but for US Tax Purposes this is just purely interest income.

So the first part which is the investments is the most complicated one because the second one really if you can figure out the interest income, the fees which are withdrawn by the bank from this interest income as well as social taxes which are being imposed by the French government on that income – then it becomes pretty easy. You just figure out what the gross income is; you convert it to US Dollars and you report it on your US Tax Return.

I will not talk today about the issue of deductibility or accrued ability of French Social Taxes. This is a different issue and a complicated one and an unsettled one as well.

But the first part, the investments is complicated because they’re usually considered to be PFICs for US Tax Purposes. As such, they are required to be disclosed on your US Tax Return on forms 8621 even if you didn’t have any transactions.

PFICs require very complex calculations and the part of PFIC gains or PFIC dividend income which are considered to be acts of distribution is going to be taxed at the highest marginal tax in existence plus the interest rate which is being calculated once you allocate your PFIC income throughout the holding period on a per-share basis.

Sounds very complex? It is; it requires a lot of calculations. Most of the information is not readily available; the French banks are not required by the French government to keep this information on file or more importantly to disclose it to French Taxpayers. Only US Taxpayers who need to report these Assurance Vie Accounts on their US Tax Returns, only they need this information and in order to get it, it’s a pain. It may take anywhere between three to nine months to get this information depending on the French institution, depending on whether you have contact with the French bank. If you don’t, it takes longer; usually it requires either a personal visit to a French bank or it may require actually a letter, a good old-fashioned paper letter being mailed to the French bank which holds the Assurance Vie Investments.

So, in short, there are a lot of issues associated with owning Assurance Vie Accounts by US Taxpayers.

If you would like to learn more about Assurance Vie Accounts and the associated US Tax Compliance requirements or you would like to get help with respect to US Tax Compliance, or if you were or think you may be required to comply with US Tax Requirements and haven’t done that yet and now you’re thinking about possible Voluntary Disclosure Options, contact Sherayzen Law Office.

Our professional team headed by myself, Eugene Sherayzen an International Tax Attorney will review thoroughly all of your documents, prepare all of the tax forms and then I will be drafting all of the legal documents associated with submitting your Voluntary Disclosure.

So call or email me now to further discuss your Assurance Vie Accounts. Thank you for watching and until the next time.