International Tax Law

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Dividend Income Sourcing | International Tax Lawyer & Attorney

One of the most important issues in US international tax law is the sourcing of income – i.e. the determination of whether the income is foreign or domestic for US tax purposes. In this article, I will introduce readers to US tax rules concerning dividend income sourcing (note, I will not be discussing substitute dividends and so-called “fast-pay” stocks as part of this article).

Dividend Income Sourcing: General Rule

Aside from limited exceptions, the source of dividend income is determined by whether the corporation that pays the dividends is foreign or domestic.

Dividend Income Sourcing: Domestic Corporations

Generally, if a US domestic corporation pays a dividend to its shareholders, the income is sourced in the United States. IRC §861(a)(2)(A).

There are three limited exceptions to this general rule, but only the first exception is really relevant at this point. The first exception is found in the complex rules concerning a Domestic International Sales Corporation (“DISC”). Basically, under IRC §861(a)(2)(D), dividends from a DISC are US-source income unless the dividends are attributable to “qualified export receipts”. In other words, if all of the gross income of a DISC satisfies the definition of qualified export receipts, then the entire gross income will be considered as derived from a foreign source. This is the basic rule and there are important exceptions and considerations that must be considered if one engages in a detailed analysis.

The second exception was a dividend paid by a Section 936 corporation. A Section 936 corporation was a special type of a domestic corporation that did business in the US possessions. At this point, the repeal of IRC §936 makes this section largely irrelevant.

Finally, the third exception existed mostly prior to 1987. At that time, if a taxpayer was able to show that 80% of the gross income of the payor corporation for the relevant period of time consisted of foreign-source income, then the dividend was also foreign-source even if it was paid by a domestic corporation. The relevant period of time for making this determination included the three fiscal years of the corporation preceding the year in which the dividend was declared (obviously, if the corporation existed for less than three years, then the period of time was reduced to the number of years the corporation had been in existence). Interestingly, with the exception of mergers and consolidations, the dividends were foreign-source even if the payor corporation filed a consolidated return with an affiliated group which did not meet what was known as the 80/20 rule.

This third exception became largely irrelevant as of January 1, 1987. However, the 80/20 corporations were exempted from tax withholding even as late as prior to 2010. At that time, the Congress finally repealed the 80/20 company rule, though it still left a grandfather clause for it.

Dividend Income Sourcing: Foreign Corporations

Dividend income sourcing with respect to foreign corporations is more complex. Generally, dividends from foreign corporations are considered to be foreign-source income unless 25% or more of the corporation’s gross income for the three years preceding the taxable year (in which the distribution occurred) was from income that was effectively connected with a trade or business in the United States. This is the so-called “25% exception”.

If the 25% threshold is satisfied, then the dividend is apportioned according to the percentage of the corporation’s income effectively connected to the United States versus foreign-source income. This rule obviously affects the ability of a US person to take full foreign tax credit.

Now, let’s look at the 25% exception from the perspective of a foreign person receiving a dividend from a foreign corporation. Again, if a foreign dividend was paid to a foreign person from a company that did not satisfy the 25% exception, then no part of the dividend was sourced to the United States. If, however, the 25% exception was satisfied, then a foreign person had US-source income according to the apportionment rule described above. In other words, a foreign dividend paid from a foreign company to a foreign individual may result in US-source income even though none of these persons are US tax residents!

Moreover, prior to 2005, such a foreign individual would have to declare this US-source income in the United States and, theoretically, pay tax on it. Obviously, this was unlikely to happen because either the foreign corporation was subject to the branch profits tax which offset the tax on dividends paid by the corporation or a tax treaty prevented the taxation of such dividend. Nevertheless, if neither exception applied, a foreign person could find himself in noncompliance with US tax laws (and there was even some litigation on this subject).

When it passed the American Jobs Creation Act of 2004, the US Congress finally relented and exempted from US taxation all dividends that fell within the 25% exception and were paid to foreign persons on or after January 1, 2005. IRC §871(i)(2)(D).

Contact Sherayzen Law Office for Professional Help with Dividend Income Sourcing

Sherayzen Law Office is a highly experienced international tax law firm that specializes in US international tax compliance, offshore voluntary disclosures and international tax planning. Our clients have greatly benefitted from our reliability, profound knowledge of international tax law (including dividend income sourcing), detailed and comprehensive approach to tax compliance and creative ethical tax planning (even during offshore voluntary disclosures). We can help You!

Singapore Central Provident Fund & US Tax Compliance | FATCA Lawyer

The Singapore Central Provident Fund is an important compliance issue for US owners of foreign accounts in Singapore. In fact, it could be the most common problem for these taxpayers. In this article, I would like to provide an overview of the main US tax compliance requirements for US taxpayers who have a Singapore Central Provident Fund account.

What is the Singapore Central Provident Fund?

The Singapore Central Provident Fund is basically a compulsory savings plan to which all working Singapore citizens and permanent residents and their employers are required (by the Singapore government) to contribute certain amount of their earnings. This savings scheme is meant to fund the workers’ future retirement, healthcare and housing needs.

The Fund is administered by the Central Provident Fund Board which reports to the Ministry of Manpower and is charged with the task of investing the contributed funds.

Structure of the Singapore Central Provident Fund

The Singapore Central Provident Fund consists of various sub-accounts: Ordinary Account, Special Account, Medisave Account and Retirement Account. The Fund also includes various Retirement Schemes, Medical Schemes (most common Medisave and Medishield), and Protection Schemes.

Sometimes, an account holder uses the Ordinary Account to fund investment schemes. One of the most important and obscure of them is the Special Discounted Shares (“SDS”) Scheme which allowed the owners of a Singapore Central Provident Fund account to obtain Discounted Singapore Telecom (“Singtel”) shares. This opportunity was provided only in 1993 and 1996. Additional loyalty shares were granted to owners who held on to Singtel shares.

US Tax Obligations: Reporting of Singapore Central Provident Fund Account

A Singapore Central Provident Fund account is a reportable foreign financial account for US tax purposes. Hence, such an account should be disclosed on both FinCEN Form 114 (FBAR) and FATCA Form 8938 as long as the applicable filing threshold is met.

Both, FBAR and Form 8938 require that the highest value of such an account is disclosed. Usually, this is not very challenging as long as there were no withdrawals from the account. The reason for it is because the value of the account is indicated on the first page of each CPF statement. The FBAR currency exchange rates should be used to translate this value for the purpose of FBAR and FATCA reporting.

If there were withdrawals, then the taxpayer is required to calculate the highest value of his account prior to the withdrawal.

In addition to FBAR and Form 8938 reporting, taxpayers should remember to disclose the existence of a Singapore Central Provident Fund account on Schedule B of Form 1040.

US Tax Obligations: Reporting Income from Singapore Central Provident Fund

In addition to reporting the highest value of a Singapore Central Provident Fund account, a US taxpayer is required to disclose all income from the account on his US tax return. Usually, this means the reporting of interest income – all of the CPF sub-accounts generate interest income typically paid at the end of the year.

This income reporting requirement, however, also covers any other income produced by the account, including any dividends paid by Singtel shares and proceeds from any sales of Singtel shares. These are items that are often missed even by US tax accountants and attorneys due to their unfamiliarity with the SDS scheme.

The interest and dividend income should be converted to US dollars based on spot rates. Then, the converted values should be reported on Schedule B of Form 1040.

Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Singapore Central Provident Fund

The reporting of a Singapore Central Provident Fund account is one of the biggest sources of US tax noncompliance among individual US taxpayers who own financial accounts in Singapore. Besides what I listed above, there may be other applicable US tax requirements to such an account.

This is why, if you own a Singapore Central Provident Fund account, contact Sherayzen Law Office for professional help. Our firm can help you not only properly disclose the account for US tax purposes, but also correct any prior noncompliance related to the reporting of this type of an account or any income it generated.

French Bank Accounts FBAR / FATCA Obligations | FATCA Law Firm

November 24, 2018/in International Tax Attorney, Legal Notes /by Manager

The FBAR and FATCA obligations with respect to French bank accounts are extensive and can often be quite burdensome for US owners of these accounts. This is one of the main reasons why France has been consistently one of the top sources of clients for my firm with respect to offshore voluntary disclosures. In this essay, I would like to discuss the FBAR and FATCA obligations of individual US taxpayers who own French bank accounts.

Who Needs to Report French Bank Accounts to the US Government?

It is important to understand that, with respect to individuals, all US tax residents must comply with their FBAR and FATCA obligations concerning their French bank accounts. US tax residency is defined broadly to include US citizens, US “green card” holders, any individual who satisfied the Substantial Presence test and individual who declared himself a US tax resident on his US tax return. This is the general rule; important exceptions exist and it is the job of your international tax attorney to determine whether you are eligible for any of these exceptions.

FBAR Obligations With Respect to French Bank Accounts

US tax residents must file FBARs with respect to their French bank accounts as long as they meet the filing requirements of this form.

FBAR’s current official name is FinCEN Form 114, the Report of Foreign Bank and Financial Accounts. It is one of the important and dangerous information returns that exists in the United States. Let’s understand a little bit better why this is the case.

FBAR must be filed by a US person as long as the aggregate highest balance on this person’s foreign bank and financial accounts (including signatory authority accounts, not just accounts owned individually or jointly) is in excess of $10,000. As used here, “US person” is almost identical to the definition of a US tax resident.

The term “account” is defined much broader for FBAR purposes than how this term is commonly used in our society. It includes not only the regular checking and savings accounts, but also investment accounts, life insurance policies with a cash surrender value, precious metals accounts, earth mineral accounts, et cetera. In other words, if there is a custodial relationship between the financial institution and the US person’s foreign asset, it is very likely that the IRS will determine that an account exists for FBAR purposes.

Now, we can appreciate why FBAR is such a dangerous form – it has very low eligibility requirements. The combination of a low filing threshold of just $10,000 and a very broad definition of “account” makes it very likely that a US owner of French bank accounts will need to file this form.

Moreover, not only is it easy to trigger the FBAR requirement, but the FBAR penalties are outrageously high. Not only are there potential criminal penalties, but there are also significant civil willful penalties (up to $100,000 adjusted for inflation per account per year or 50% of the value of the account per year, whichever is higher) and civil non-willful penalties (up to $10,000 adjusted for inflation per account per year). In other words, the FBAR penalties can have a devastating impact on the economic well-being of an owner of French bank accounts.

The low filing threshold, broad definition of account and draconian penalties make FBAR the most dangerous form with respect to French bank accounts; an utmost effort must be made to file FBARs timely and correctly.

FATCA Form 8938 Obligations With Respect to French Bank Accounts

FATCA Form 8938 is the broadest (in terms of the assets covered) information return in the US tax code with respect to reporting of foreign assets. This form is filed with a taxpayer’s US tax return (unlike FBAR) and requires US persons to report all of their Specified Foreign Financial Assets (“SFFA”).

SFFA includes a huge array of foreign financials assets, including foreign bank and financial accounts (however, signatory authority accounts are not reportable on Form 8938) and “other” foreign financial assets. Among these “other” assets are bonds, stocks, ownership interest in a closely-held business, beneficiary interest in a foreign trust, an interest rate swap, currency swap; basis swap; interest rate cap, interest rate floor, commodity swap; equity swap, equity index swap, credit default swap, or similar agreement with a foreign counterparty; an option or other derivative instrument with respect to any currency or commodity that is entered into with a foreign counterparty or issuer; and so on.

Moreover, in addition to SFFA, Form 8938 requires US persons to report their foreign income related to SFFA directly on the form. In other words, FATCA Form 8938 directly incorporates the worldwide income reporting requirement.

The filing threshold for Form 8938, while lower than that of FBAR, is still not high. For example, if a taxpayer lives in the United States, he will need to file Form 8938 if he has SFFA of $50,000 ($100,000 for a married couple) or higher at the end of the year or $75,000 ($150,000 for a married couple) or higher during any time during the year. A very large portion of the French immigrants to the United States meet these thresholds.

Failure to file Form 8938 may lead to assessment of heavy penalties. While not as high as those of FBAR, Form 8938 penalties are much more diverse and may ultimately bite as hard as FBAR penalties.

Let’s go over the main penalties. First, Form 8938 has its own $10,000 failure-to-file penalty which may go up to as high as $50,000 in certain circumstances. Second, Form 8938 noncompliance will lead to an imposition of much higher accuracy-related penalties on the income tax side – 40% of the additional tax liability. Third, Form 8938 noncompliance will limit the taxpayer’s ability to utilize Foreign Tax Credit.

Finally, since Form 8938 is integrated within a taxpayer’s US tax return, the failure to file Form 8938 will keep the Statute of Limitations open potentially on the entire tax return for three years after the form is ultimately filed (and, potentially forever if the form is never filed). This means that the IRS may be able to go back much further than the general three-year statute of limitations in order to audit past tax returns.

Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your French Bank Accounts

If you have French bank accounts, contact Sherayzen Law Office for professional help. As you can see, both FBAR and FATCA requirements concerning French bank accounts may be quite complex and difficult to meet. Moreover, the failure to comply with either of these requirements may result in the imposition of heavy IRS penalties.

Sherayzen Law Office has extensive experience with respect to reporting French bank accounts in the United States. Furthermore, we have successfully conducted numerous offshore voluntary disclosures in order to remedy past tax noncompliance with respect to these accounts. We can help You!

Spanish Bank Accounts & US Tax Compliance | International Tax Lawyer

November 15, 2018/in International Tax Attorney, Legal Notes /by Manager

Despite the surge in FATCA letters from Spanish banks in the past two years, there is a significant number of US taxpayers with Spanish bank accounts who still have not complied with their US tax obligations. In this essay, I would like to discuss the most common US tax reporting requirements of individual US owners of Spanish bank accounts.

Spanish Bank Accounts: the Key Importance of US Tax Residency

Virtually all US tax requirements with respect to Spanish bank accounts apply only to US tax residents. Therefore, it is important to understand who is considered to be a “US tax resident”.

Generally, this term includes: US citizens, US Permanent Residents, a person who satisfied the Substantial Presence Test and a person who declared himself as a tax resident. There are certain exceptions to this general rule, and your international tax lawyer will need to determine whether you are eligible for any of these exceptions or whether you can take a position under the relevant tax treaty to escape US tax residency.

It is important to point out the tax concept of US tax residency should not be confused with the immigration term “US permanent resident”. “US tax resident” has a much broader definition that encompasses US permanent residents, but also includes many other types of individuals. In my practice, I have noticed that this confusion is a frequent cause for mis-interpretation of US tax rules by immigrants who come to the United States on a visa, but who are not yet US Permanent Residents.

Now that we understand who is responsible for the disclosure of Spanish bank accounts to the IRS, we are ready to discuss the most common US tax reporting requirements that apply to these accounts.

Spanish Bank Accounts: Worldwide Income Reporting Requirement

All income earned by Spanish bank accounts must be reported on the US owner’s US tax return. The income must be reported in the United States irrespective of whether it was disclosed on Spanish tax returns, subject to Spanish tax withholding or never transferred to the United States.

The reason for such an invasive rule is the worldwide income reporting requirement that applies to all US tax residents irrespective of where they reside and where the income is earned. The worldwide income reporting requirement applies to all types of income, including bank interest income, dividends, capital gains, et cetera.

It should be pointed out that not all of the income earned in Spain would necessarily be treated similarly in the United States for income tax purposes. For example, income generated by mutual funds will be treated as PFIC income in the United States. You need to consult an international tax lawyer to determine the proper treatment of your Spanish income.

Spanish Bank Accounts: FBAR

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts, popularly known as “FBAR” is one of the most important and dangerous reporting requirements that applies to Spanish bank accounts. It is difficult to overstate the importance of this form, because of the enormous threat that FBAR poses to US owners of Spanish bank accounts.

The danger of FBAR stems from two factors. First, with the low filing aggregate threshold of just $10,000, FBAR is a very common information return that must be filed by the vast majority of Spaniards who move to the United States and US citizens who live in Spain.

Second, the main danger of the form stems from FBAR’s draconian system of penalties, which may be assessed by the IRS even in a non-willful situation. In other words, the penalties may be assessed even if the taxpayer simply did not know about the existence of FBAR.

If you have violated any of these FBAR requirements or just never filed the form, you should contact an experienced international tax lawyer for professional help.

Spanish Bank Accounts: FATCA Form 8938

While a newcomer (by tax standards), FATCA Form 8938 quickly became the FBAR contender for the first place of most important tax requirements. Created by the Foreign Account Tax Compliance Act in 2011, Form 8938 requires US tax residents to report all of their Specified Foreign Financial Assets (“SFFA”) as long as the filing threshold is met.

The threshold is much higher than that of FBAR. Still, Form 8938 is triggered if a taxpayer resides in the United States and has only $50,000 ($100,000 for a married couple) or higher on his Spanish bank accounts at the end of the year or $75,000 ($150,000 for a married couple) or higher during any time during the year. For most middle-class Spaniards who come to the United States, it is not a problem to meet this threshold.

While Form 8938 penalties are not as high as those of FBAR, Form 8938 is still a very dangerous form and, in some aspects, a lot more dangerous than FBAR. First of all, Form 8938 has a much broader scope than FBAR. The definition of SFFA includes not only foreign bank and financial accounts, but all sorts of other financial instruments including bonds, ownership interests in foreign businesses and even a beneficiary interest in a foreign trust. In a sense, Form 8938 is a “catch-all” form that is likely to require the reporting of foreign financial assets that were not disclosed on any other tax forms.

Second, Form 8938 is filed with and forms part of a taxpayer’s US tax return. For this reason, Form 8938 penalties affect the income tax penalty calculations, the taxpayer’s Foreign Tax Credit claims as well as the IRS ability to open up tax returns that would otherwise be closed under the general three-year Statute of Limitations.

Finally, it should be mentioned that Form 8938 has its own penalty structure for failure to file the form and other violations of its requirements.

Contact Sherayzen Law Office for Professional Help With the US Tax Reporting of Your Spanish Bank Accounts

In this short essay, I just listed the main and the most common three US tax reporting requirements that may apply to Spanish bank accounts owned by US tax residents. There may be other requirements that may apply to these US taxpayers.

Contact Sherayzen Law Office for professional help with your US tax compliance. We will determine what types of US tax requirements apply to your particular facts, prepare the necessary annual compliance forms to make sure you meet these requirements and conduct an offshore voluntary disclosure with respect to any requirements that you may have violated in the past.

4th Quarter 2018 Underpayment and Overpayment Interest Rates

October 17, 2018/in International Tax Law, Legal Notes /by Manager

On September 7, 2018, the IRS announced that the 4th Quarter 2018 underpayment and overpayment interest rates will not change from the 3rd Quarter of 2018.

This means that, the 4th quarter 2018 IRS underpayment and overpayment interest rates will be as follows:

five (5) percent for overpayments (four (4) percent in the case of a corporation)
five (5) percent for underpayments
seven (7) percent for large corporate underpayments; and
two and one-half (2.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the interest rates are determined on a quarterly basis. This means that the next change in the IRS underpayment and overpayment interest rates may occur only for the 1st Quarter of 2019. In fact, if the analysts are correct, it may very well happen in early 2019.

The 4th Quarter 2018 underpayment and overpayment interest rates are important for many reasons. Not only are these rates used to determine what the IRS will charge in case of an amended tax return (including an amended return made as part of an offshore voluntary disclosure), but they will also determine the interest rate for any adjustments made by the IRS during an audit.

Moreover, the IRS underpayment rates are used to calculate the interest charged on the PFIC (default IRC Section 1291) tax due on an excess distribution. It should be remembered that PFIC calculations de facto remain outside of the Statute of Limitations and PFIC interest can be charged on any PFIC gains made in 2018 but allocated to any prior year (all the way to 1988).

It is important to prevent some US tax accountants from falling into a common trap concerning distributions of accumulated income from a foreign trust. There is a myth that the interest rates on UNI tax is calculated based on the IRS underpayment and overpayment interest rates. This is incorrect – the Throwback Rule follows a separate method for calculating the interest on the UNI tax.

Sherayzen Law Office continues to track any changes IRS makes to its overpayment and underpayment interest rates.