Specified Domestic Entity: Passive Test | FATCA Form 8938 Lawyer & Attorney

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This article is published as part of a long series of articles on the Specified Domestic Entity (“SDE”) Definition. In a previous article, I stated that the term “formed or availed of” consists of two legal tests: the Closely-Held Test and the Passive Test. Since I already explained the general requirements of the Closely-Held Test in another article, I would like to focus today on the Passive Test.

The Passive Test: Background Information

Starting tax year 2016, business entities classified as SDEs may be required to attach Form 8938 to their US tax returns. What entity is considered to be SDE? The answer is found in Treas. Reg. §1.6038D-6(a): “a specified domestic entity is a domestic corporation, a domestic partnership, or a trust described in IRC Section 7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.”

I already explained in a previous article that “formed or availed of” is a term of art and a requirement that an entity meets two legal tests: the Closely-Held Test and the Passive Test.

The Passive Test: General Requirements

The Passive Test consists of two threshold requirements: the Passive Income Threshold and the Passive Assets Threshold. If one of these Thresholds is satisfied, the Passive Test is met and a business entity would be considered as formed or availed of for the purposes of holding specified foreign financial assets. Let’s explore these two requirements in more detail.

The Passive Test: the Passive Income Threshold

The Passive Income Threshold is satisfied if “at least 50 percent of a corporation’s or a partnership’s gross income for the taxable year is passive income.” Treas. Reg. §1.6038D-6(b)(1)(ii). The definition of passive income includes:

“(A) Dividends,

(B) Interest;

(C) Income equivalent to interest, including substitute interest;

(D) Rents and royalties, other than rents and royalties derived in the active conduct of a trade or business conducted, at least in part, by employees of the corporation or partnership;

(E) Annuities;

(F) The excess of gains over losses from the sale or exchange of property that gives rise to passive income described in paragraphs (b)(3)(i)(A) through (b)(3)(i)(E) of this section;

(G) The excess of gains over losses from transactions (including futures, forwards, and similar transactions) in any commodity, but not including –

(1) Any commodity hedging transaction described in section 954(c)(5)(A), determined by treating the corporation or partnership as a controlled foreign corporation; or

(2) Active business gains or losses from the sale of commodities, but only if substantially all the corporation or partnership’s commodities are property described in paragraph (1), (2), or (8) of section 1221(a);

(H) The excess of foreign currency gains over foreign currency losses (as defined in section 988(b)) attributable to any section 988 transaction; and

(I) Net income from notional principal contracts as defined in § 1.446-3(c)(1).” Treas. Reg. §1.6038D-6(b)(3).

The Treasury Regulations also contain certain exceptions to the definition of passive income (for example, for dealers).

The Passive Test: the Passive Assets Threshold

The Passive Assets Threshold is satisfied if at least 50 percent of the assets held by a corporation or a partnership for the taxable year “are assets that produce or are held for the production of passive income.” Treas. Reg. §1.6038D-6(b)(1)(ii). Such assets are called “passive assets”. Id.

The percentage of passive assets held by a corporation or a partnership during a taxable year is determined based on “the weighted average percentage of passive assets (weighted by total assets and measured quarterly).” Id. This is very similar to the PFIC test.

The regulations allow for two different methods of valuation of the assets for the purpose of the Passive Asset Threshold. The first method is Fair Market Value of the assets. The second method is valuation of assets based on the “book value of the assets that is reflected on the corporation’s or partnership’s balance sheet.” Id. Surprisingly, both US and an international financial accounting standard are permitted for the purpose of the valuation of assets (usually, only US GAAP is allowed).

Contact Sherayzen Law Office for Professional Help with FATCA Form 8938 Compliance

If you are concerned about whether your entity is required to file Form 8938 or you have any other FATCA-related questions, please contact Sherayzen Law Office for professional help. Sherayzen Law Office is an international tax law firm that specializes in the US international tax compliance, including FATCA Form 8938 compliance. We have helped hundreds of US taxpayers with their FATCA requirements and We can help You!

Contact Us Today to Schedule Your Confidential Consultation!

Shakira Tax Evasion is Reportedly Investigated by Spain | Tax Law News

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On January 23, 2018, the Spanish Newspaper based in Madrid “El País” broke the news that the Colombian Singer Shakira (full name Shakira Isabel Mebarak) is being reportedly investigated by the Spanish tax authorities for tax evasion. Let’s explore the alleged Shakira tax evasion investigation in more detail.

Alleged Shakira Tax Evasion Investigation is Centered Around Spanish Tax Residency

At the core of the alleged investigation of potential Shakira tax evasion lies the concept of tax residency. Under the tax laws of Spain, a person who resides in Spain for at least 183 days during a calendar tax year may generally be considered a Spanish tax resident. As such, he would be required to disclose his worldwide income on a Spanish tax return.

It should be noted (as Sherayzen Law Office has pointed out in the past) that Spain is a very strict tax jurisdiction in many aspects, especially when it comes to tax evasion. In fact, it is the only country in the European Union which has a form similar to the IRS Form 8938 – Spanish Modelo 720.

Alleged Shakira Tax Evasion Investigation: 2011-2014 Tax Residency of Shakira in Question

El País reported that the Spanish tax authorities focused their investigation of Shakira on tax years 2011 through 2014. The singer has claimed that she was resident of the Bahamas at that time. Shakira’s lawyer stated that Shakira lived in several places over the years due to her lifestyle as an international singer and has been in full compliance with tax laws of all relevant jurisdictions.

The tax authorities reportedly reached a different conclusion – that Shakira was a Spanish tax resident during the years 2011, 2012, 2013 and 2014. It is not clear whether the alleged conclusion was arrived at using direct evidence or indirect evidence. El País, for example, stated that the Spanish Tax Agency investigators went to her hairdresser in Spain to establish that Shakira lived in Spain.

It should be pointed out that Shakira officially declared herself as a Spanish tax resident in 2015 due to her marriage with the Spanish soccer player Gerard Pique.

Paradise Papers Could Have Prompted the Investigation of Potential Shakira Tax Evasion

The alleged Shakira Tax Evasion investigation also has an interesting twist. It appears that it could have been prompted by the famous Paradise Papers in November of 2017.

The Paradise Papers is a collection of 13.4 million of files that were stolen from the client files of Appleby Law Firm, a Singapore-based trust company, as well as company registries of nineteen different jurisdictions.

According to the Paradise Papers, Shakira transferred some or all of her intellectual property and trademarks to Tournesol, Ltd., (“Tournesol”) a company registered in Malta in 2009. Shakira is the sole shareholder of this company. Tournesol increased its capital by 31 million euros through an interest-free loan agreement with ACER Entertainment, a related company owned by Shakira and registered in Luxembourg.

Alleged Shakira Tax Evasion Investigation: Potential Penalties

Shakira’s estimated net worth is $200 million. This means that her tax fraud case will involve large numbers, possibly in the millions of dollars.

It appears that if Shakira is found guilty of tax fraud that is in excess of 600,000 euros, she could be facing from two to six years in prison for each count of tax fraud. Moreover, she could be facing a fine of six times the amount of underpaid tax. It should be pointed out that the charges will most likely focus on the years 2012-2014, because 2011 appears to be barred by the Spanish statute of limitations.

Shakira’s celebrity status will not have any impact on the Spanish tax authorities. In fact, she now joined a list of many celebrities who have been investigated by the Spanish Tax Agency, including Lionel Messi and Cristiano Ronaldo.

Swiss Voluntary Disclosures Rise as Swiss AEOI Compliance Nears

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The voluntary disclosures by Swiss taxpayers jumped dramatically in 2017. The most likely reason for the increase is the fact that the Swiss government started to collect information under its numerous Automatic Exchange of Information (“AEOI”) agreements. Let’s analyze in more detail this connection between the Swiss voluntary disclosures and the Swiss AEOI Compliance.

Swiss AEOI Compliance: Increase in Swiss Voluntary Disclosures

The increase in Swiss voluntary disclosures between 2015 and 2017 is undeniable. The Swiss said approximately 350,000 voluntary declarations were made in 2016, compared to 328,000 in 2015. While the numbers for 2017 for the entire country are not available, we can extrapolate the 2017 numbers based on the canton of Zurich.

On January 4, 2018, the canton of Zurich reported that there were almost three times as many of voluntary disclosures of unreported assets by Swiss taxpayers in 2017 than in 2016. A total of 6,150 voluntary disclosures were submitted in 2017 whereas only 2,100 voluntary disclosures were made in 2016. The disclosures brought in about 104 million Swiss francs of additional tax income in 2017; the 2016 number was only 85 million Swiss francs.

The Swiss government also stated that the 2017 voluntary disclosures concerning ownership of real estate in Italy, Portugal and Spain were especially high.

Swiss AEOI Compliance Has a Direct Impact on Swiss Voluntary Disclosures

The connection between Swiss AEOI compliance and the increase in the voluntary disclosures is obvious. In fact, the cantonal government of Zurich directly stated that it attributed the jump in voluntary disclosures to the Swiss AEOI agreements, especially those related to the EU countries.

Already in 2017, the Swiss government started collecting financial information about Swiss taxpayers in order to turn it over to its partner jurisdictions under the Swiss AEOI agreements. The exchange of information under the Swiss AEOI compliance obligations is scheduled to begin in the fall of 2018 for the calendar year 2017 and 2019 for the calendar year 2018.

The Swiss AEOI compliance obligations are very broad due to the fact that Switzerland signed AEOI agreements with 53 jurisdictions already, including the European Union. The European Union is considered to be a single jurisdiction even though it consists of twenty-eight countries. The EU-Switzerland AEOI agreement was approved by the Swiss Parliament in 2016.

The Connection Between Swiss AEOI Compliance and FATCA

As Sherayzen Law Office has repeatedly pointed out in the past, the passage of FATCA in the United States has completely changed the international tax landscape concerning international information exchange with respect to foreign accounts and other foreign assets. In fact, FATCA and the DOJ Program for Swiss Banks have completely destroyed the vaulted Swiss bank privacy laws (though, the 2008 UBS case made the first hole in this bastion of offshore privacy).

After seeing the success of FATCA with respect to US tax compliance, the rest of the world joined the party. The new Common Reporting Standard or CRS was the OECD’s response to FATCA with an ambition to force even more transparency than required by FATCA and making this transparency apply to the United States. The US government refused to join CRS, but it did not prevent the CRS into growing in as important of an international tax compliance standard as FATCA.

Additionally, the enforcement of FATCA had another side-effect: a rapid proliferation of the AEOI agreements, both bilateral and multilateral. The new web of AEOI agreements is growing larger with the passage of time forcing an ever greater international tax transparency. The recent Swiss AEOI compliance is just the latest example of this trend.

Will we ever see a reversal of this trend? It is a real possibility, but it is unlikely that it will be able to destroy the legal groundwork for greater tax transparency that has been laid out by FATCA, CRS and the AEOI agreements.

IMF Wants “Modern” Croatian Real Estate Tax | Tax Lawyer News

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On January 16, 2018, the International Monetary Fund (“IMF”) released its 2017 Article IV consultation notes with respect to Croatia. Among its recommendations is the introduction of a modern Croatian Real Estate Tax.

Croatian Real Estate Tax: IMF assessment of Croatian Economy

The IMF began on the positive note stating that, in 2017, Croatia continued its third year of positive economic growth, mostly supported by tourism, private consumption, trade partner growth and improved confidence. The IMF also noted that the fiscal consolidation was progressing at a much faster pace than originally anticipated with Croatia leaving the European Union’s Excessive Deficit Procedure in June of 2017. The international organization made other positive comments, particularly stressing that Croatia was overcoming its Agrokor crisis.

Then, the IMF turned increasingly negative. It first noted that, while the balance risks has improved, it was not satisfied with the high level of Croatian public and external debt levels. Then, it stated that the full impact of the Agrokor restructuring is not yet known. The IMF was also unhappy about the pace of structural reforms since 2013 (when Croatia became a member of the EU), further stating that Croatia’s GDP per capita stood at about 60% of the EU average and Croatian business environment remained less favorable than that of its peers.

Finally, the IMF expressed its concerns over the fact that the output did not recover from its pre-recessing level and stated that, in the medium-term, the Croatia’s economic growth is expected to decelerate. Hence, the IMF emphasized that Croatia needed to do more to improve its economic prospects.

Croatian Real Estate Tax: IMF Recommendations

What precisely does Croatia need to do in the IMF opinion? Mainly reduction of public debt.

How does the IMF recommend that Croatia accomplish this task? The IMF made a number of proposals that can be consolidated into five courses of action. First, enhance the efficiency of public services by streamlining public services. Second, keep the wages low and reform the welfare state policies (here, it probably means either slashing the state benefits or privatizing them). Third, relaxing the labor regulations, particularly in the areas of hiring and temporary employment. Fourth, enhancement of legal and property rights. Finally, improvement of the structure of revenue and expenditure.

This last enigmatic phrase is the keyword for reducing the expenses and the introduction of new taxes. In particular, the IMF wants to see an introduction of a modern Croatian real estate tax.

What is a “Modern” Croatian Real Estate Tax According to IMF

The IMF defined a “modern” Croatian real estate tax as a “real estate tax that is based on objective criteria” and the one that “would be more equitable and would yield more revenue than the existing communal fees.” The idea is that “a modern more equitable property tax could allow for a reduction of less growth-friendly taxes.” In fact, the additional revenue derived from this tax “could compensate for a further reduction in the income tax burden, the parafiscal fees, or even VAT.”

It should be noted that the Croatian government already listened to the IMF and tried to impose a Croatian real property tax starting January of 2018, but the implementation of the law was suspended in light of strong public opposition.

Sherayzen Law Office will continue to monitor the situation.

Form 8938 Filing Thresholds | FATCA Tax Lawyer and Attorney Update

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Form 8938 is one of the most important US international tax forms with its own sophisticated penalty structure. Hence, taxpayers should strive to understand when they are required to file the form. In this context, I would like to focus in this essay on the Form 8938 Filing Thresholds.

General Relevant Criteria in the Determination of the Form 8938 Filing Thresholds

There are three most relevant criteria for determining the Form 8938 filing threshold that may apply to a taxpayer: (1) whether the taxpayer is a Specified Individual or a Specified Domestic Entity; (2) the taxpayer’s tax return filing status; and (3) whether the taxpayer resides in the United States or outside of the United States.

I have already described in other articles the criteria for determining whether a taxpayer is a Specified Individual or a Specified Domestic Entity. Hence, for the purposes of this essay, I will assume that the taxpayer satisfies the requirements of one of these categories. Therefore, I will focus solely on the Form 8938 filing thresholds based the filing status and the place of residence.

Form 8938 Filing Thresholds for Unmarried Taxpayers

If a taxpayer files his US tax returns with an unmarried filing status (i.e. “single” or “head of household”) and resides in the United States, he will satisfy the Form 8938 reporting threshold if the total value of the taxpayer’s Specified Foreign Financial Assets (“SFFA”) is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

If the unmarried taxpayer resides outside of the United States, then the values would go up to more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.

Form 8938 Filing Thresholds for Taxpayers Whose Filing Status is “Married Filing Jointly”

If a taxpayer files his US tax returns as “married filing jointly” and resides in the United States, he will satisfy the Form 8938 reporting threshold if the total value of his SFFA exceeds $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. If this taxpayer resides outside of the United States, then the Form 8938 reporting thresholds will increase to more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.

Form 8938 Filing Thresholds for Taxpayers Whose Filing Status is “Married Filing Separately”

If a taxpayer files his US tax returns as “married filing separately”, then his Form 8938 reporting thresholds are going to be the same as those of an unmarried taxpayer.

Form 8938 Filing Thresholds for Specified Domestic Entities

Finally, a Specified Domestic Entity has the same Form 8938 Filing Thresholds as those of an unmarried taxpayer who resides in the United States – i.e. SFFA value must be more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Contact Sherayzen Law Office for Professional Help With Form 8938

If you were required to file Forms 8938 in the previous years and you have not done so, you may be subject to Form 8938 penalties. In order to avoid or mitigate your Form 8938 penalties, you need to explore your offshore voluntary disclosure options as soon as possible.

Sherayzen Law Office can help You! We are an international tax law firm that specializes in offshore voluntary disclosures of unreported foreign assets and foreign income. We have successfully helped clients from close to 70 countries. You can be next!

Contact Us Today to Schedule Your Confidential Consultation!