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Specified Domestic Entity Definition | Boston Form 8938 Lawyer

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In my handout you see that here the general definition of under the ‘Specified Domestic Entity’ table we see the general definition here directly from the Treasury Regulations 1.6038D-6(a) and it says: ‘A specified domestic entity is a domestic corporation, a domestic partnership or a trust described in IRC Section 7701(a)(30)(E), if such a corporation, partnership, or trust is formed or availed of for the purpose of holding, directly or indirectly, ‘Specified Foreign Financial Assets‘.

Wow, what a sentence, huh?! Let’s read it again. ‘A Specified Domestic Entity’ is a domestic corporation, domestic partnership and a trust described in IRC Section 7701(a)(30)(E), if such a corporation, partnership or trust is formed or availed of for the purposes of holding directly or indirectly ‘Specified Foreign Financial Assets‘.

You know, one of the reasons why I love international tax law is because every clause requires further interpretation. Let’s see, pretty much everything here is subject to further analysis. Let’s take this sentence apart. So we see here ‘Specified Foreign Financial Assets‘; we already talked about them; we have a full description of them or I shouldn’t say full description of them; it’s as comprehensive as I can make them. At this point obviously there are assets with equivalent to the assets that you have listed in your handout and that would be required to be reported on form 8938.

A domestic corporation is pretty easy to understand. It’s a corporation formed under the laws of any of the States of the United States. Partnership: for the purpose of not getting into any complexities sketches; let’s assume it’s the same thing – any partnership formed under the laws of the States of the United States.

In actuality, there are certain rules which can make an entity that is formed in the United States a foreign partnership. We’re not going to touch those today.

And then a trust described in IRC Section 7701(a)(L)(1)(830)E, basically they’re talking about ‘Domestic Trust’. There’s a Section 7701(a)(30)(E); it describes two tests: the control test and the court test that must be met in order for the trust to be designated as a domestic trust.

Okay, now we’re going to get to the most interesting part: ‘Formed or Availed of‘ for purposes of holding ‘Specified Foreign Financial Assets’. Now you know if you just read the sentence, you would think the IRS is talking about an entity formed with the intention of holding ‘Specified Foreign Financial Assets‘. That there’s going to be a discussion of intent, that something we have to dig into the evidence, dig into the facts: what was the purpose of establishing the entity? Nothing like that. It has, the intent here has no role whatsoever.

‘Formed or Availed of‘ for purposes of holding ‘Specified Foreign Financial Assets‘ – it actually means slightly different things for foreign corporations and partnerships vs. trusts, but it actually means compliant with specific requirements.

Now what are these ‘specific requirements’? Let’s start with the corporations of partnerships because it’s a more complex analysis. Here on the second box, I have a description, a general description that a corporation of a partnership have to pass a closely-held test and a passive test.

Who is Required to File Form 8938? | International Tax Lawyer New York

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Who is required to file Form 8938? ‘Specified Persons’. Okay, we are getting real close to our discussion of ‘Specified Domestic Entity’.

Specified Persons until 2016, or if you want to be more technical, until all the tax years that start after December 31, 2015, if you want to take the direct line and use that exact language.

Specified Persons included US Citizens, US Tax Residents and that of course includes all the US Green-Card Holders and all of the persons who satisfied the Substantial Presence Test, all of the non-resident aliens who chose to declare themselves tax residents for the purpose of filing a joint tax return and residents of Puerto Rico and Possessions, US Possessions. So we’re talking about Guam, American Samoa and the North Mariana Islands.

Does anyone see here a common thread throughout this category of pre 2016 categories of filers? Does anyone want to take a guess? We’re talking about citizens, tax residents… (inaudible) exactly! All of them are individuals. So what happened this year is that now it’s no longer just individuals; businesses are required to file form 8938; businesses that satisfy the requirement of ‘Specified Domestic Entity’.

Domestic Trust as a Specified Domestic Entity | Trust Tax Lawyer Manhattan

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If the ‘Specified Individual‘ is a current beneficiary of the trust then the trust is considered a ‘Specified Domestic Entity’. What it means is that any type of a US Beneficiary will make the trust a Specified Domestic Entity by definition; it’s very easy for a ‘Specified Trust’ to be a Specified Domestic Entity.

Now what does it mean ‘Current Beneficiary’? It basically means that the beneficiary either receives a distribution or is entitled to a distribution, even if the distribution is never made, even if the distribution is in the discretion of the trustees. So in essence any type of Complex or Simple trust, it doesn’t really matter, as long as there is a US beneficiary.

Is everyone familiar with a ‘Complex Trust’ vs ‘Simple Trust? A Simple Trust is where basically all of the income of the trust is required to be distributed on an annual basis to the beneficiary and the Complex Trust is a situation where there is a discretion or an impart of income that is a requirement of the distribution to the beneficiary.

Check-the-Box Rules Introduction | International Tax Lawyer Delaware

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Let’s put it put it this way: a majority of foreign companies would be considered as foreign corporations under US Law except the check-the-box rules, that’s a major exception. You can choose what the company will be irrespective of its default classification under US Tax Law.

So, in your example if the US Company, a limited liability partnership would create a SARL outside of the United States and transfer the assets, (I’m going to use this example a little bit later again, because it’s going to be very interesting as with respect to pointing out a specific reporting requirements), so in this case, if they were to transfer all the assets to that SARL company, and they would file a form 8832 choosing for this company to be treated as a partnership, no problem. The IRS will accept its designation as a partnership as long as it’s properly named, timely and properly.

If this were SA as I’ve mentioned a societe limitee, then check-the-box rules would not apply. Per Se corporations are always corporations; Check-the-Box rule exception does not apply.

Check-the-Box Rules Have Tax Consequences | International Tax Lawyers Miami

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But you have to be conscious of the fact that if you’re going to change the classification of a foreign entity, you have to be extremely careful because the very fact that you change the classification of an entity could result in huge, absolutely huge tax liability to your clients.

I’ll give you an example from my practice. My client owned a Polish partnership. How do I know that it was a partnership? One of the owners did not have? Any guess? Limited Liability; that’s right.

So, it was a Polish partnership. He was the 55% owner of the company, okay? He also owned a Polish corporation; he was a 98% owner of it, okay? A Controlled Foreign Partnership, he (my client was a US Citizen), a Controlled Foreign Corporation. As a result of a change in the local Polish laws, they decided that it may well be a good idea to switch this company to a corporation, (sorry) to partnership and this company to corporation. This was a real estate and this was trade. In reality this partnership didn’t do anything directly. But most importantly, most important for our purposes: they were switching this; so, they were switching exactly the opposite: the corporation and the partnership.

In this case, a Polish partnership to a Polish corporation and a Polish corporation to a Polish partnership, in the same country, everything outside of the United States. This company did not have any built-in gains. It was a trading company. It didn’t really have anything except inventory; it didn’t really have any assets of importance.

This one had real estate, so you can imagine, and this was real estate development company; so, there were really some built-in gains here in the assets.

For the purposes of US International Tax Law, what had happened here, by the way, this happened on the same day; so what happened here was that this Polish partnership contributed to its assets in return to the corporate shares and immediately dissolved. Distributing the shares of a corporation to, shares to the Taxpayer, okay? a US Citizen In this case; there was no tax liability. There could have been but in this particular partnership, let’s just say for the moment that there’s not any, but there was no tax liability, but there’s a potential for the partnership distribution without any (but) in actual gain; so, in this case nothing, no tax consequences.

In this case, what happened for US Tax purposes, is that the corporation distributed all of the assets to its shareholders at Fair Market Value. So there were big, big gains here and then the assets were treated as contributed into the partnership at the Fair Market Value. On top of that, this is a Controlled Foreign Corporation. (Later you’ll learn toward the end of my presentation) that since this is a CFC, Controlled Foreign Corporation, Subpart F rules kicked in and prevented the gain from being treated as a capital gain.

There were other stretches that I utilized to lower the tax liability, but that’s a different point; when I first looked at, it I saw this; when I looked at it a second time, I started working it and that’s a different story.

You have to be very conscious that when you check the box; it’s not as if this is some insignificant event and you just check the box; it’s a real dissolution of the entity and a real creation of another one. Even though, I should mention that in both cases, under the Polish accounting, they did not do anything to distinguish the Polish accounting to the pre-dissolution from the post-dissolution; for them for Polish purposes, it was a change of name. In both cases with no tax consequences whatsoever. They did not treat it as a taxable event at all.

So, obviously he had Polish tax advisors and they said, ‘No problem, we’ll then switch it; it’s going to be pretty good for you’. But, he never took into account the fact that as a US Citizen, he’s taxable on his worldwide income and he would be taxed very much on this even though it never left Poland, and even under Polish law, it didn’t mean anything.