A domestic corporation or partnership that (a) directly or indirectly holds foreign financial assets, and (b) has at least 50 percent of its gross income or assets as passive, will have to report said foreign financial assets.
Corporations or partnerships may use either fair market value or book value to determine the value of their assets (as reflected on the entity’s balance sheet and as determined under either a U.S. or an international financial accounting standard). The Treasury Department and the IRS believe that a 50 percent passive assets or income threshold appropriately captures situations in which individuals may use a domestic corporation or partnership to circumvent certain reporting requirements.
Treasury Decision 9752 adopts several modifications to the term “passive income” for these reporting purposes, including:
An aggregation principle exists whereby domestic corporations and partnerships that have an interest in specified foreign financial assets and are closely held by the same individual are treated as a single entity.
A domestic trust may be subject to reporting as well if it has an interest in foreign financial assets with an aggregate value exceeding the reporting threshold, and an individual that is a “current beneficiary.” A current beneficiary includes any holder of a general power of appointment, whether or not exercised, that was exercisable at any time during the tax year, but does not include any holder of a general power of appointment that is exercisable only on the death of the holder.
Failure to comply with reporting foreign financial assets can lead to harsh IRS penalties. If you have any questions or concerns related to foreign tax compliance or reporting, please reach out to a member of Withum’s International Services Team at email@example.com.
|Mark Farber, CPA, Partner
|CJ Stroh, Esq.
To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.