Planning Considerations for U.S. Persons Changing Country of Residency/Domicile
- Dec 2, 2021
Desire to immerse in another culture, retire to an exotic location, move to maximize tax position, get away from the U.S. political climate, move back to the country of birth, work in an environment to expand one’s horizons or move to another country just for the experience -- all some of the many reasons that may prompt a U.S. individual to leave the U.S. While advanced tax planning can ease many issues with respect to the potential residency/domicile change, there is no cookie-cutter approach to this planning. In this article, we discuss generic planning considerations as they relate to two sets of U.S. individuals and suggest that before undertaking any residency/domicile change, one should consult with a professional well-versed with a matter of this nature. The two sets include:
I. U.S. individuals who are considered U.S. residents by virtue of meeting a substantial presence test under the U.S. Internal Revenue Code (“IRC” or “Code”), or other non-green card U.S. visa holders located in the U.S. (e.g., J, F, Q. H-1, etc.) who wish to permanently exit the U.S. For this purpose, we assume that these U.S. individuals will return to their former home country. This assumption is important because if the person is moving to a country other than his home country, the planning considerations take on yet another dimension, unique to that individual.
II. U.S. citizens or U.S. green card holders (“U.S. persons”) who wish to change their residency or domicile; that is, move to a foreign jurisdiction, and possibly seek a second passport. For this purpose, we assume that this person is not expatriating, that is, relinquishing his/her U.S. citizenship or U.S. green card. If expatriation is the reason for domicile/residency change, additional considerations apply which will be part of another article in this series.
First, a quick overview of how a U.S. citizen or U.S. resident alien and a non-resident of the U.S. are taxed under the Internal Revenue Code. No matter where a U.S. citizen or a U.S. green card holder resides, the Code continues to apply unless that person takes specific steps to give up U.S. citizenship or U.S. green card, or U.S. residency. When a U.S. citizen or a U.S. resident alien becomes a non-resident of the U.S., she is taxed only on U.S.-source income (discussed in some detail later in the article).
Broadly speaking, U.S. citizens or U.S. resident aliens:
1. Are taxed on their worldwide income.
2. Are subject to U.S estate and gift tax on their worldwide assets.
3. Are subject to U.S. anti-deferral tax regimes with respect to their ownership interest in foreign entities, assuming all parameters are met and even where no actual distributions or income is received from such foreign holdings. Examples of the U.S. anti-deferral tax regime include:
- GILTI regime applicable to all income with respect to interest in a controlled foreign corporation (“CFC”).
- Subpart F regime applicable to foreign passive type income (e.g., interest, dividends, rent, royalties), foreign sales income and foreign services income with respect to interest in a CFC.
- Passive foreign investment company (“PFIC”) regime applicable to passive type income (e.g., interest, dividends, rent, royalties) from a foreign corporation that is not a CFC.
4. Continue to remain subject to their former home state tax filing obligations unless proper steps are taken to change state residency/domicile before leaving the U.S.
5. Continue to remain subject to the U.S. foreign reporting obligations (see Attachment A below for examples of these). Non-filing, incomplete filing, or non-disclosure of income required under some of these forms is subject to heavy penalties (sometimes as high as $100,000 per year, for example if FBAR – Form 114 non-compliance is considered willful).
6. Broadly speaking, is not likely to be taxed on the same income twice, by virtue of the U.S. foreign tax credit regime where applicable, foreign income exclusion provisions, and in many cases applicable tax treaties.
Generally, a non-resident of the U.S. is taxed in the U.S. only on the income considered U.S. source:
- At a tax rate of 30% on a gross basis if such income is considered FDAP (fixed, determinable, annual, and periodic) income, unless an applicable tax treaty reduces this tax rate or income is exempt under the Internal Revenue Code. Examples of FDAP income include interest, rent, royalty and dividend income from personal services as an independent contractor, or
- At a graduated rate on a net basis if such income is considered effectively connected with a U.S. trade or business.
Generally, U.S.-source capital gains are not taxable to a non-resident unless the person is in the U.S. for 183 days or more and gain is not from the sale of a U.S. real property interest, or from sale of an interest in a partnership that is engaged in a U.S. trade or business. Sales of inventory property by a non-resident may be taxable to a non-resident if certain parameters are met.
I. Planning considerations related to permanent exit from the U.S. by a person who is considered a U.S. resident alien by virtue of meeting the substantial presence test or holding non-green card U.S. visa (e.g., J, F, Q, H-1 etc.)
- Deciding the date to exit the U.S. or terminate U.S. residency:
An individual ceases to be a U.S. resident on the residency termination date. This date can be the end of the calendar year (that is, December 31) or, if certain parameters are met, it can be an earlier date. Generally put, if an earlier termination date is desired, the individual must prove “tax home” and “closer connection” to a foreign country at his actual date of departure. Proper planning around the early termination date is required because the individual is required to provide a statement under penalties of perjury that he/she has a closer connection to the foreign country.
- Obtaining “sailing permit:”
U.S. resident individuals (unless exceptions apply) are required to obtain a sailing permit (a departure permit) before leaving the U.S. The sailing permit is submitted on Form 2063 or Form 1040-C, together with a long list of tax documents, including prior-year tax returns. These forms require that a “certificate of compliance” section is signed by the IRS. The IRS, after reviewing all necessary information, certifies that the individual’s tax obligations are met. Only after the sailing permit is obtained is the individual no longer considered subject to U.S. tax after his/her exit from the U.S. Some examples of individuals who do not require a sailing permit include: alien students, industrial trainees, and exchange visitors, including their spouses and children, who enter on an “F-1,” “F-2,” “H-3,” “H-4,” “J-1,” “J-2,” or “Q” visa if and only if they meet certain strict parameters (e.g., no income from the U.S., other than an allowance to sustain expenses incident to studying, or income from services permitted by the relevant visa), representatives of foreign governments with diplomatic passports, etc.
- Reviewing assets held in the U.S. and reviewing acceptable tax connections to the U.S. after such exit:
This is an important planning consideration for those individuals who were considered U.S. residents for U.S. tax purposes while in the U.S. Once the U.S. residency is terminated, the taxation of this individual reverts to that of a non-resident. While only U.S.-source income is taxable to a non-resident, the tax burden as a non-resident can take a very different course or can become more involved if exit from the U.S. is not pre-planned.
Let us take as an example -
Assume that A, an individual from Country X, comes to the U.S on an H-1 employment visa and works for a U.S. corporation for three years. He opens a bank account in the U.S., enters a partnership with his friend to conduct business in the U.S., provides seed cash in exchange for a 30% interest in his friend’s U.S. corporation and buys a home in the U.S. He also has a bank account in Country X, with a maximum value of $100,000, from which he earns a small amount of interest. For the three years he is in the U.S. on the H-1 visa as a U.S. resident under the Internal Revenue Code, he is required to file a U.S. income tax return disclosing his Country X bank account on Form 8938, and must pay tax on his worldwide income, including interest income from his Country X bank account, interest income from the U.S. bank account, U.S. wages income and partnership income by filing Form 1040 (let us assume that the U.S. corporation pays no dividend). He seeks deductions for real estate taxes and mortgage interest paid on his home in the U.S.
Toward the end of his third year in the U.S., he decides to terminate his U.S. residency as of the end of the calendar year, and he obtains a sailing permit and departs from the U.S. With that, A’s tax situation in the U.S. reverts to that of a non-resident of the U.S.
As a non-resident of the U.S, he does not need to disclose his Country X bank account in the U.S., nor pay tax on interest income from his Country X bank account, as this income is not U.S.-source. Assuming he rents the U.S. property, he is subject to 30% tax in the U.S. on rental income on a gross basis, unless he elects to treat such rental income as effectively connected with the U.S. trade or business. With that election, the rental income is taxed on a net basis at a graduated tax rate. As to his interest in the partnership in the U.S., the partnership is required to withhold and pay over taxes to the IRS on the distributive share of his income from the partnership. A is now required to file Form 1040-NR in the U.S. disclosing income from the partnership, and the rental income. He can claim credit for the taxes withheld by the partnership on the distributive share of his partnership income. As to his interest in the U.S. domestic corporation, the domestic corporation is now required to file Form 5472 to disclose his interest in the U.S. entity.
As one may observe, after his departure from the U.S., A’s tax situation in the U.S. took a very different course. If this individual did not wish to be subject to U.S. tax, he could have sold his U.S. residence and the U.S. partnership interest, thus obviating a need to file a U.S. tax return. The future dividend payments from his ownership of the U.S. corporation being a U.S.-source FDAP type income would be subject to withholding by the corporation not requiring filing of any tax return by him.
II. Planning considerations related to domicile or residency change by a U.S. citizen, or a U.S. green card holder (“U.S. person”)
A quick note as regards U.S. green card holders – broadly speaking, the discussion in Part I above applies to green card holders who wish to leave the U.S. permanently. However, if this green card holder is considered a long-term resident of the U.S., the expatriation provisions of IRC Sec. 877A must also be reviewed as part of pre-departure planning considerations. The IRC Sec. 877A rules should be reviewed also where a U.S. citizen wishes to give up his U.S. citizenship.
With that as the background, while a U.S. person’s reasons for changing residency/domicile can be many, the planning considerations can be discussed under two broad categories:
A. Residency or domicile change due to employment, which can be
- at the behest of the current U.S. employer,
- at the request of the employee to the employer, or
- at the choice of an individual wanting to actively seek an overseas employment.
B. Residency or domicile change for reasons other than employment.
ll.A. Employment-related residency or domicile change
The employment-related move can fall within five broad categories:
- Expat assignment – where the employer sends the U.S employee to a foreign country for a period of one to five years. The employee generally returns to the U.S at the end of this assignment. We may hasten to add to not confuse expatriation under IRC Sec. 877A with expat assignment. While IRC Sec. 877A deals with relinquishing a U.S. green card or U.S. citizenship, an expat assignment is generally at the behest of an employer who wishes to send a star employee to a foreign country for career enhancement.
- International transfer – may also start at the behest of the U.S employer and can be longer than five years, or permanent, and the employee may or may not return to the U.S.
- Business travel – relatively a short travel to a foreign country as part of the job requirement with no intention to remain in a foreign country for longer than a year, e.g., executives going to a foreign country to meet with local employees, potential clients, explore the business environment for future expansion, etc.
- International wanderer – this category includes employees who “slip off” to a foreign country without informing the U.S employer or an employee who specifically requests to work from a foreign home, for example, to accompany a spouse who is being sent on an expat assignment.
- International move to seek employment – this category includes an individual who is not sent by a U.S employer to a foreign country but actively seeks an employer in a foreign jurisdiction for a permanent position or for a few years.
In general, the employer provides extensive resources to those in categories one, two or three, and this article will not dwell on these categories. Those in category four may receive support from the employer of the spouse, assuming that the move is related to spousal expat assignment or international transfer. Others in category four who decide to slip off to other countries should review planning considerations for employment or a non-employment related move. A bonus note -- the employer of an employee in category four should review this move very carefully. This is because presence of an employee in a foreign country may subject the U.S employer to the foreign country’s payroll, labor laws, health care laws, social security tax obligation, and similar such requirements. Depending on the type of work performed by this employee, the U.S. employer may be deemed to create a tax presence in a foreign country where this employee ends up – a possible undesirable consequence for the employer who may not be interested in global expansion.
The fifth category individual is who we concentrate on in this article.
7. Choice of employment location and favorable tax regimes: The choice of employment location can be purely a whim, a factor of availability of employment at a location or wanting to seek employment at a country of choice. No matter the location of the country of employment, an individual should review any employment-related favorable tax regime, if any available, and negotiate with the potential employer to be able to participate in that regime. For example:
- The Spanish “non-dom” tax regime is structured to attract senior corporate individuals. Assuming all parameters are met, for a period of five years, the executive may be taxable only on the Spanish-source employment income (as opposed to worldwide income) of up to Euro 600,000 at a reduced tax rate of 24%.
- The UK “non-dom” regime may allow a UK resident, who has his permanent home (‘domicile”) outside the UK, to pay tax only on UK-source income and no tax on foreign-source income if certain parameters are met.
- France has a “special expatriate regime” to help attract company directors and employees to France. If certain conditions are met, the part of the employee’s remuneration directly related to expatriation is exempt from income tax, possibly for a period of up to eight years.
One must also explore other non-employment related tax incentives, if any available, discussed in IIB below.
- Complexity in applying for a visa:
In general, the employer is likely to help the potential employee with the required visa. The individual, however, must assess the desired date for entering the foreign country and complexities associated with obtaining the visa, which may affect that plan. One should not discard the possibility that a visa may be denied after the employee moves to the country or delayed to such an extent where the in-country employer is left with no choice but to terminate employment. One should not discard the possibility that the employer may rescind the offer due to extenuating circumstances. Employing a law firm well-versed in visa process and labor law parameters may be advisable.
- Avoid being subject to double tax on the employment income and, if applicable, other income:
A person employed in a foreign jurisdiction may meet the residency rules of the foreign country’s tax law and may be subject to tax on worldwide income in the foreign country. Planning considerations around this issue may include:
- Seeking foreign tax credit in the U.S for taxes paid to the foreign country.
- Reviewing treaty tie-breaker rules under the applicable treaty between the U.S and the foreign country, to determine which of the two jurisdictions – U.S. or foreign country -- may have a right to tax an item of income.
- Reviewing U.S source of income rules and determining if the foreign income can be excluded from the U.S. tax return.
- Reviewing other treaty provisions that may tax certain income only in one and not both countries and applying for certificates of exemption where applicable.
- Reviewing favorable tax regime discussed in Section I above.
- Coverage under social security and health insurance system:
While a young professional may not be concerned with social security payments at retirement, this is something that should not be overlooked. The planning considerations include:
- Reviewing available social security totalization agreements if any and determining which country will subject wages to social insurance – U.S. or foreign.
- Reviewing when and how the social security payments will be made/paid – termination of employment, retirement, after meeting certain age requirement, etc.
- Ensuring coverage in some social insurance systems to avoid missing out on income from social security/social insurance system at retirement after years of work.
- Determining what kind of health insurance coverage is available under the foreign country health insurance arrangement -- is this coverage enough given the family situation, are there any supplemental plans needed to ensure adequate coverage in the case of medical emergency, or otherwise, how to find a health care provider in a foreign country?
Participation in the local pension or retirement or incentive plan:
- In many cases the foreign employer may allow participation in a local pension, retirement, or other incentive plan or in other cases an individual may continue under a U.S. employer plan. Where participation occurs under the foreign country program, the planning considerations include:
- Will the foreign program meet the qualification requirements of the U.S. tax code?
- If not, are the employer contribution to the program and accumulated earnings in the program tax deferred or taxable in the U.S?
- Does an available tax treaty ameliorate taxation in the U.S.?
- Will the participation in the foreign program require filing of additional foreign information reporting forms such as IRS Form 3520, 3520-A, 8621, 8938, etc. in the U.S.?
Fringe benefits received, and other personal family matters:
The employer may offer, or an individual may need to negotiate, other benefits, such as use of company car, housing allowance, education expenses for children, commuter expenses, etc. The planning considerations around these may include:
- Are these additional payments taxable or tax-free in the foreign country? If taxable, what avenues may be explored to mitigate the effects of the same, e.g., deductions, credits, partial tax only, etc.
- Are these additional payments taxable in the U.S, and what can be done to mitigate the effect of the same when filing a U.S. tax return, e.g., seek foreign housing exclusion, foreign income exclusion, foreign income tax credit, review exemptions under an applicable tax treaty, etc.
Plan to exit the foreign country and expatriation regime in foreign country:
- Assuming that under the foreign country tax law an individual is considered a resident of that country, that individual should pre-plan an exit strategy and know the expatriation regime of the foreign country. The foreign country’s expatriation regime may require tax to be paid before leaving the country or seek special permission to leave the country. Non-compliance with these requirements can be problematic as an individual may either end up paying a large tax or if exit is without complying, the local tax authorities can audit well after that individual is no longer in the country.
The above by no means is the complete list of all the issues to think of or plan around when leaving the U.S for employment purposes. The above is food for thought to be considered while remembering that everyone’s situation is unique, and that uniqueness should be factored in any planning. In addition to the above, the following as it relates to moves unrelated to employment, and should be considered.
ll.B.Residency or domicile change for reasons other than employment
The common reasons for leaving the U.S. other than employment could include retirement, get away from the U.S. political environment, return to the land of one’s parents, immersion in local culture, or in many cases maximizing global tax position. Generic planning considerations are discussed below with a caveat that a detailed discussion must be undertaken with a professional well-versed in these issues.
- Visa and passport regulations:
One of the planning considerations before moving to a country revolves around being able to meet visa requirements to enter the country, and later passport requirements.
- Some countries, e.g., Portugal, Turkey, or Malta, provide the lure of a passport to non-residents who are ready and willing to make substantial in-country donations, or purchase local real estate, or a combination of both.
- Some countries, e.g., Barbados and Estonia, lure remote employees with long-term work permits but, when it comes to a passport, may require extended periods of in-country stay.
- Israel provides a “decision period” during which a person may be taxed only on their Israel-source income. If the person is undecided about wanting to move to Israel, this “decision period” can be a great planning consideration.
The planning considerations then are: Does one have finances to make the donations? Is one willing to work while in retirement? Is one willing to wait until the passport period is satisfied?
- Residency for tax purposes:
The term “resident” for tax purposes varies across jurisdictions with a common theme being either a bright line test of 183 days in the country or a facts and circumstances test that the country is the individual’s center of economic activity during the tax year. Some countries require registration of the tax authorities to start the 183 days test and other countries use the 183 days as a fallback test to support the facts and circumstances (economic center test). Some countries, e.g., Israel, allow a “decision period” in which to decide to become or not to become resident of Israel, and during the decision period one is taxed as a non-resident.
Meeting or not meeting a residency definition under a country tax code determines how an individual is taxed in that country. Once an individual is considered a resident for tax purposes, that individual’s worldwide income becomes subject to tax in that country. A non-resident is taxed only on the income that is considered sourced to the country. In the way of planning, therefore, an individual may review residency rules for tax purposes, compare the same with the residency rules for visa and passport purposes before deciding if they want to move to a country or not. The sourcing rules vary from country to country and should be reviewed considering likely income stream from the assets owned or likely to be owned in the future.
- Review the host country tax regime for tax incentives, types of income taxed or exempted, tax rates on various income types, special advantageous residency/domicile rules, rules related to investment in real property, etc.
This planning consideration is best explained using country-specific examples. Depending on what the goals are -- tax incentive, no tax, no double tax, want to be close to family and tax impact does not matter – an individual may choose one country over another. Assuming all conditions are met, for instance:
- Costa Rica – taxes only income derived from Costa Rican sources irrespective of nationality and resident status.
- Bermuda – has no income tax.
- Switzerland – does not tax rental income from property located in a foreign jurisdiction.
- Special inbound assignee regimes, e.g., France, for employees can reduce tax on foreign source interest, dividend, capital gains, etc.
- Many countries have no estate, inheritance, and gift tax regime if gift, inheritance by or to spouse or to lineal descendants.
- Italy gives tax incentive to high net worth individual to come live in Italy.
- UK “non-dom” regime allows remittance basis tax under which UK tax occurs only if investment income and capital gains are remitted to the UK.
- Portugal under special non-habitual tax regime may exempt income from non-Portuguese sources during a ten-year period.
- Spain allows “non-dom” status for five years to certain employee categories during which they are taxed only on their Spain-source wages income.
- A U.S. person’s investment in the real property in a foreign country is not subject to foreign information reporting requirements in the U.S. However, if the same property is held by an entity in the foreign jurisdiction, such holding becomes subject to U.S foreign information reporting requirements.
- Tax return filing obligations in the U.S and in the foreign country:
After a residency/domicile change, a U.S person will need to file a tax return not only in the U.S. but also in the foreign country which is now a new home. The planning considerations with respect to the tax filing obligations include:
- Can the accountant one has been working with for many years help file the required tax returns both in the U.S. and in that foreign country?
- What is the due date for filing the tax return in the foreign country and what is the tax year for purposes of filing a tax return? For example, the UK tax year begins April 6 of year one and ends April 5 of year two; whereas the U.S. tax year starts January 1 of year two and ends on December 31 of year two. The U.S. tax year two return would include the UK income tax year that begins year one April 6 and ends April 5 year two. The UK income and taxes paid for that year are to be considered in filing the U.S. tax return. The relevant UK tax return should therefore be available before the U.S. tax return filing deadline.
- What income is includible in the foreign country tax return; is there a tax treaty or incentive program that may exclude an item of income from the foreign country tax return?
- What is the procedure for timely payment of the balance due in the foreign country and in the U.S. – electronic, cashier’s check, by withholding?
- Other general planning considerations:
In addition to the above, the following general planning considerations should also be reviewed.
- Consider “exit tax” provisions if one wishes to leave the new home country and return to the U.S. or go live somewhere else.
- Chart a course of action to manage one’s tax affairs in the U.S. – monitoring bank contacts, making tax payments, possibly renting your principal residence. Before leaving the U.S., one should make a detailed list of all the contacts or establish an electronic payment system so that any transaction in the U.S. does not require personal presence.
- Keep track of special situations where a U.S. person can treat an item of income as foreign-source and claim a foreign tax credit. For example, the sale of foreign stock by a U.S. person is considered U.S- source and, unless an applicable treaty allows, the U.S. person cannot claim credit for the taxes paid on sale of the foreign stock to a buyer in the foreign country. As to this same U.S. person, if she sells the stock while located outside the U.S., the gain on sale may be recharacterized as foreign source and the U.S. person may be able to claim a foreign tax credit with respect to that sale irrespective of the availability of an income tax treaty.
- Always look out for new legislation in the new home country, in the U.S. and in the country where assets are held. For example, recently Canada imposed a 1% tax on vacant properties held by non-residents.
- Continue to maintain foreign country visa requirements and tax residency requirements to maintain the visa and subsequent passport processes.
- The final and the most important aspect of domicile/residency change is to be able to enable an emergency return to the U.S. in the event of unrest in the foreign country.
In summary, many issues should be reviewed before undertaking a residency/domicile change. A professional well-versed with U.S. and new home country laws should be consulted before leaving the U.S. Any investment in a foreign country should be reviewed considering tax incentives, taxability, and applicable regimes at sale. While many countries around the world have enacted legislation attractive to high net worth individuals, many other countries are moving toward legislation that may begin taxing the non-resident investment. This is important to remember because while an individual is considered a resident of country A, she can be a non-resident investor of country B. Filing of tax returns in multiple jurisdictions before and after establishing residency in a new country or deciding which country to settle in is not for the faint of heart. And in the case of change of residence, the applicable tax treaty and provisions in the treaty may change an individual’s tax position with respect to assets held in another foreign jurisdiction or income sourced to a country subject to a tax treaty. A firm well-versed and capable of handling issues across jurisdictions must be engaged to ensure intelligent decision making, to stave off complexity, and smooth transition to a new home country.
As stated before, a U.S. person remains subject to U.S. foreign information reporting requirements, if applicable. Briefly, below are some of these –
- Ubiquitous forms – FinCen Form 114 (required under Bank Secrecy Act) and Form 8938 (required under Internal Revenue Code)
- Many of the items reported on Form 114 are also reported Form 8938, with Form 8938 requiring report of additional foreign financial assets not reported on Form 114. The threshold filing requirements for Form 114 are lower than those for Form 8938.
- Form 114 – Report of foreign bank and financial accounts.
- Broadly speaking, this form is used to report bank deposit accounts, foreign currency accounts, and accounts where one has signature authority
b. Form 8938 – Statement of specified foreign financial assets. Broadly speaking,
ii. If threshold requirement is met, the foreign financial assets reported on Form 114 are also reported on Form 8938
iii. Signature authority accounts are not reported on Form 8938
iv. Also reported on this form are
- Other foreign assets such as interest in a foreign corporation, partnership, pension, disregarded entity, beneficial interest in a trust, etc.
- Income from foreign financial assets
- Interest in a foreign real property unless held thru an entity is not reportable
2. Forms required if interest in a foreign entity – corporation, partnership, foreign branch, or disregarded entity
a. Form 5471 – Information returns of U.S. persons with respect to certain foreign corporations. Very broadly:
- This form is used to report 10% or more interest in a foreign corporation, or interest in a CFC
- Depending on ownership interest, this form is filed annually or when specific transaction with a foreign corporation occurs, e.g., acquisition of 10% or more ownership interest
- After the 2017 Tax Cuts and Jobs Act, this form is expanded exponentially and enables IRS to identify income from foreign corporation quite easily
- This form also identifies if the filer has received taxable Subpart F or GILTI income, or whether distributions are received from the CFC
b. Form 926 – Return by a U.S. transferor of property to a foreign corporation. In general:
- Where certain thresholds are met transfer of cash of $100,000 or more and other property to a foreign corporation are reported on this form
c. Form 8865 – Return of U.S. persons with respect to certain foreign partnerships. Very broadly:
- Similar in concept to Form 5471 but relates to foreign partnership interest and may need to be filed annually or transactionally
- Contribution of cash or property to a foreign partnership is reported on Form 8865
- Distributive share of income from foreign partnership is taxable to U.S. taxpayer
d. Form 8858 – Information returns of U.S. person with respect to foreign disregarded entities (FDEs) and foreign branches (FBs). Broadly speaking,
- Similar in concept to Form 8865 and 5471 but not as onerous and filed in the context of ownership of an entity held 100% or operation of a foreign branch
e. Form 8621 – Information returns by a shareholder of a PFIC or qualified electing fund (“QEF”). Broadly speaking,
- A PFIC is a foreign corporation that has certain percentage of passive type income or passive type asset
- Foreign mutual funds, or so-called “foreign insurance policies,” can be a PFIC
- Tax consequences of a PFIC (unless timely elections are made) are draconian, e.g., no capital gains treatment, interest and penalties dating back to when the funds were first held
3. Forms required if interest in foreign trust
a. Form 3520 – Annual return to report transactions with foreign trusts and receipts of certain foreign gifts. Broadly speaking -
- Transfer to or distributions from a foreign trust or distributions from a foreign trust is reportable on Form 3520
- Grantor of a foreign trust is required to file this form annually
b. Form 3520-A – Annual information return of foreign trust with a U.S. owner
- The U.S. owner of a foreign trust must annually file this form and furnish required annual statement to its U.S. owners and U.S. beneficiaries
c. Note that both these forms are to be filed by March 15
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Ragini Subramanian is a Tax Senior Manager in the Private Client Services Group.
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