Evaluating Foreign Legal Structures (US Taxes & Reporting)

Evaluating Foreign Legal Structures (US Taxes & Reporting)

Evaluating Foreign Legal Structures 

While US tax law can be difficult, the intricacies of international tax law can be overwhelming for many taxpayers. That is because taxpayers must navigate between two or more countries (and oftentimes) competing tax laws to successfully prepare and submit their US taxes and international information reporting forms. For example, what may be considered an estate planning tool in some countries (such as a Sociedad Anonima) may be considered a per se corporation under US tax law. Likewise, an entity such as Stiftung that may have been created for use as a foundation may be designated as a foreign trust under US tax law. Let’s take an introductory look at how you can evaluate a foreign legal structure.

Corporation, Partnership, or Flow-Through

The starting point for most analyses is to determine the type of structure it is considered under foreign law and then use that evaluation to determine how it may be classified under US tax law preferred example, Form 8832 provides a baseline understanding of how certain entities that are structured will be considered for US tax purposes.

Default Rules:

      • Foreign default rule.

        • Unless an election is made on Form 8832, a foreign eligible entity is:

          • A partnership if it has two or more members and at least one member does not have limited liability.

          • An association taxable as a corporation if all members have limited liability.

          • Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.

Is It a Per Se Corporation?

If the foreign entity is a corporation, the next issue is to determine whether it is a per se corporation. When a foreign entity is deemed to be a per se corporation under US tax law, that means that the corporation cannot be disregarded. Some common examples are a Sociedad Anonima and a Canadian Corporation.

Is it a Foreign Trust?

If the foreign entity is neither a corporation, partnership, nor flow-through, then it may be considered a foreign trust. This is where it can get very complicated because a foreign trust can also include foreign pensions – because technically a foreign pension has all the makings of a foreign trust. Then it must be determined whether it is the type of foreign trust that has to report Form 3520/3520-A, or whether it can escape reporting on the Revenue Procedure 2020–17.

Is it a Pooled Fund?

Pooled funds are very common. Two very common types of foreign funds are mutual funds and ETFs. There are other versions of foreign pooled funds such as some unit trusts and mirror refunds, which can mimic a mutual fund. If the foreign fund is considered a pooled fund, then the question becomes whether the taxpayer must file Form 8621 – which is a complicated tax form – to disclose ownership in Passive Foreign Investment Companies (PFICs). Likewise, there are also some exceptions and exclusions when it overlaps with other forms such as Form 5471 — if it is a Passive Foreign Investment Company is also a Controlled Foreign Corporation.

Life Insurance

Foreign life insurance or life assurance is a very common type of investment tool. It can be used to supplement a pension, or it can be used as an investment tool – but typically with foreign life insurance pension plans that are linked to investment funds (ULIPs) the primary goal is not the death benefit. Thus, it can become very complicated when reporting foreign life insurance — when the investment component is the majority of the investment – as well as the taxation in conjunction with annual increased value, subject to any reductions based on premium payments. US tax and reporting of foreign life insurance can be very complicated.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.