Reporting Requirements for Foreign Financial Accounts

Transcription

1 Reporting Requirements for Foreign Financial Accounts Final FinCEN Regulations on Foreign Bank and Financial Account Reporting SUMMARY On February 23, 2011, the Financial Crimes Enforcement Network of the Department of the Treasury ( FinCEN ) released final regulations (the Final Regulations ) under the Bank Secrecy Act (the BSA ) relating to annual information reporting requirements for certain foreign bank and financial accounts in which United States persons have a financial interest or over which they have signature or other authority (such report referred to as an FBAR ). 1 While the Final Regulations contain relatively few changes from the proposed regulations issued on February 26, 2010 (the Proposed Regulations ), 2 the Preamble to the Final Regulations includes many explanations, primarily in response to comments received on the Proposed Regulations. Significant changes and explanations include (i) changes made for accounts held through trusts, (ii) clarification on what is a foreign account, (iii) clarification of who is a U.S. person for purposes of the FBAR, (iv) revisions and additional guidance with respect to the filing and record-keeping obligations of persons with signature authority over a financial account, and (v) a clarification of the definition of a mutual fund. In addition, like the Proposed Regulations, the Final Regulations do not adopt the filing requirement for non-u.s. persons in and doing business in the United States that was introduced in the October 2008 FBAR instructions. The Final Regulations do not require filing by, but continue to reserve on the treatment of investment companies other than mutual funds or similar pooled funds. The Final Regulations apply to FBARs required to be filed by June 30, 2011 with respect to calendar year 2010, FBARs for all subsequent calendar years, and, at the filer s election, FBAR filings that were deferred under Notice We have confirmed in conversations with personnel at the IRS that a new version of the FBAR will be issued with revised instructions. New York Washington, D.C. Los Angeles Palo Alto London Paris Frankfurt Tokyo Hong Kong Beijing Melbourne Sydney

2 BACKGROUND The FBAR reports a U.S. person s financial interest in, or signature or other authority over a bank, securities, or other financial account in a foreign country. 4 The FBAR must be filed for each calendar year with respect to a U.S. person s financial accounts, if the accounts exceed $10,000 in value in the aggregate, and the FBAR must be received by the Department of the Treasury on or before June 30th of the following year. 5 A revised FBAR was issued by the IRS in 2008, making certain changes to and clarifying the FBAR instructions. Many uncertainties remained, however, including who would be considered a United States person for purposes of the filing requirement, 6 the extent to which persons with mere signature authority over (and no financial interest in) financial accounts were required to file, and the application of the filing requirements to interests in foreign hedge funds and foreign private equity funds. On February 26, 2010, FinCEN published the Proposed Regulations, along with draft instructions to the FBAR. On the same date, the IRS released Notice , which provided that individuals with signature or other authority over, but no financial interest in a foreign account for which an FBAR was otherwise due for 2009 and prior calendar years were given an extension until June 30, 2011 to report those foreign financial accounts. Because of the uncertainty regarding commingled accounts, the IRS also determined that persons with a financial interest in, or signature authority over, a foreign commingled fund other than a mutual fund would not be required to file an FBAR with respect to that account for calendar years 2009 and earlier. FILING REQUIREMENTS FOR ACCOUNTS HELD THROUGH TRUSTS Like the Proposed Regulations, the Final Regulations apply a look-through rule when determining whether a U.S. person has a financial interest in an account. In the case of trusts, a U.S. person will have a financial interest in an account where the title to the account is held by a trust if the U.S. person is the trust grantor and is treated as having an ownership interest in the trust account for U.S. federal income tax purposes under the grantor trust rules. 7 In addition, under the Final Regulations, a U.S. person with a present beneficial interest in more than 50% of the assets of a trust or who receives more than 50% of the current income of a trust is considered to have a financial interest in the financial accounts of that trust. 8 The Final Regulations differ from the Proposed Regulations in that they add the words present and current. The Preamble states that FinCEN does not intend that a beneficiary of a discretionary trust should have a financial interest in a foreign account simply because of the beneficiary s status as a discretionary beneficiary. Further, the Preamble states that FinCEN does not intend to include a remainder interest within the scope of the term present beneficial interest for purposes of filing an FBAR. (The Preamble notes that the word current was inadvertently omitted from the text of the Proposed Regulations.) Beneficiaries with filing -2-

3 obligations under the Final Regulations are nonetheless exempt from filing, under a special rule, if the trust, trustee, or agent of the trust is a U.S. person and files an FBAR with respect to the trust s financial accounts. 9 The Proposed Regulations included in the definition of the term financial interest a trust that was established by the U.S. person and for which the U.S. person has appointed a trust protector that is subject to such person s direct or indirect instruction. The Final Regulations remove this provision, however the Preamble states that arrangements designed to conceal or obfuscate ownership in the contexts of trusts, including the use of a trust protector to evade an FBAR reporting obligation, are nonetheless captured through the anti-avoidance rule of the Final Regulations. 10 DEFINITION OF A FOREIGN FINANCIAL ACCOUNT In response to numerous comments, FinCEN notes in the Preamble that as a general matter, an account is not a foreign financial account if it is maintained with a financial institution in the United States regardless of whether the account contains holdings or assets of foreign entities. Furthermore, an omnibus account with a financial institution located in the United States where assets are held outside the United States in the name of the global custodian, but where U.S. customers can only access their holdings that are outside the United States through the U.S. bank, are not foreign financial accounts. If, however, the custodial arrangement permits the U.S. person to directly access foreign holdings maintained in a foreign institution, then such an account is a foreign financial account. The Proposed Regulations had defined other financial account to include an insurance policy with cash value or an annuity. The Final Regulations modify this definition to clarify that other financial account includes not only those insurance policies with a cash value but also only annuities that have a cash value. 11 FILING REQUIREMENTS FOR INDIVIDUALS WITH SIGNATURE AUTHORITY FinCEN declined to adopt the recommendation of some commenters to eliminate the requirement that U.S. persons report those foreign financial accounts over which they have signature or other authority, but no financial interest. Instead, the Final Regulations generally adopt and clarify the definition of signature authority provided in the current FBAR instructions, defining signature or other authority as authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained. 12 The Preamble states that direct communication was added in order to clarify that the test for signature authority is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that account. This change was prompted by concerns that the Proposed Regulations definition of signature authority may have included individuals who merely participate in the decision to allocate -3-

4 assets or who have the ability to instruct or supervise others with signature authority over an account. The Preamble also states that the phrase in conjunction with another is intended to address situations where a foreign financial institution may require direct communication from more than one person regarding the disposition of assets in the account. The Preamble provides additional commentary regarding the exceptions to the signature authority requirement that apply where an officer or employee of certain regulated entities has no financial interest in an account owned or maintained by his or her employer. The Preamble states that the officers or employees covered by these exceptions are exempted from FBAR filing requirements without any requirement that they receive notice that the employer filed an FBAR with respect to these accounts. In response to certain comments and questions, the Preamble clarifies that the exception for officers and employees of a financial institution that is registered with and examined by the Securities and Exchange Commission ( SEC ) or the Commodity Futures Trading Commission 13 does not apply to officers and employees of SEC-registered investment advisers because investment advisers are not included in the definition of a financial institution. 14 Furthermore, the exception for officers and employees of an Authorized Service Provider (i.e., a SEC-registered entity that provides services to an investment company registered under the Investment Company Act of 1940) 15 only applies with respect to the reportable accounts of the Authorized Service Provider s clients that are registered investment companies and that are managed by the Authorized Service Provider. 16 Both the Final Regulations and the Proposed Regulations exempt a U.S. subsidiary s officers and employees from the filing requirements so long as the U.S. parent is listed on a U.S. national securities exchange, and includes the subsidiary in its consolidated report. 17 The Preamble explains that this exception is not extended to U.S. subsidiaries of foreign parents listed on a U.S. national securities exchange because a foreign parent cannot file a consolidated FBAR on behalf of its U.S. subsidiaries. Similarly this exception is not extended to U.S. subsidiaries of foreign parents listed on foreign exchanges. The Preamble states that the exception does not include officers and employees of foreign subsidiaries where the accounts are listed in the U.S. parent s report, even though these officers and employees could have been exempt under existing FBAR instructions. Finally, the Preamble states that the exception does not apply to employees of a U.S. parent who also have signature authority over the foreign accounts of a U.S. parent s subsidiary that have been included in the parent s consolidated FBAR report. 18 The Preamble states that officers or employees who file an FBAR because of signature or other authority over their employer s foreign financial accounts are not expected to personally maintain the records of the foreign financial accounts of their employers. In response to comments FinCEN received on the Proposed Regulations, the Final Regulations clarify that the exception for officers or employees of a corporation with a class of equity securities listed on a -4-

5 U.S. national securities exchange includes officers or employees of a corporation with listed American Depositary Receipts ( ADRs ). FinCEN considered but declined making the exception applicable to officers or employees of a foreign corporation with unlisted ADRs traded over-the-counter if they are listed on the Designated Offshore Securities Market, ADRs with unlisted trading privileges on a national securities exchange, or ADRs with unlisted trading privileges under section 12(f) of the Securities Exchange Act. DEFINITION OF UNITED STATES PERSON The Final Regulations retain the revised definition of United States person contained in the Proposed Regulations, which refers to the definition in Section 7701 of the Internal Revenue Code of 1986 as amended (the Code ), with some modifications. This language does not adopt the filing requirement for non-u.s. persons in and doing business in the United States that was introduced in the October 2008 FBAR instructions. The Preamble to the Final Regulations indicates that the tax treatment of an entity (e.g., whether an entity is tax-exempt for U.S. federal income tax purposes) has no effect on the entity s filing obligations. Furthermore, the Preamble also states that an individual who elects to be taxed as a U.S. person for tax purposes under another Code section does not become a U.S. person for the purposes of FBAR filing requirements. An individual who elects under Code Section 7701(b) to be treated as a resident for tax purposes should file FBARs only with respect to foreign assets held during the period covered by the election. A legal permanent resident who elects, under a tax treaty, to be treated as a non-resident for tax purposes must still file the FBAR. The Preamble also states that the election of a foreign insurance company to be treated as a U.S. company for tax purposes does not render the entity a U.S. person for FBAR purposes. MUTUAL FUNDS In response to the concerns of some commenters that the definition of mutual funds or similar pooled funds may include hedge funds and private equity funds, the Final Regulations revise the definition to include the words which issues shares available to the general public. The Preamble states that this language will also be added to the FBAR instructions. In Notice , the IRS stated that the IRS would not apply enforcement authority adversely against filers who had an interest in a commingled fund other than a mutual fund and did not report that interest as a foreign financial account for calendar years 2009 and earlier. The Final Regulations reserve on the appropriate treatment of investment companies other than mutual funds or similar pooled funds. As a result, there is currently no requirement in the Final Regulations that interests in commingled funds other than mutual funds or similar pooled funds must be reported in filings with respect to calendar year 2010, if -5-

6 they do not otherwise constitute foreign financial accounts under the Final Regulations, and the administrative relief of Notice remains in effect for calendar years prior to OTHER RULES FinCEN declined to adopt the recommendation of some commenters that pension and welfare benefit plans be exempt from the filing requirements. FinCEN, discussing comments, acknowledges that the simplified filing requirements that apply to persons with signature authority over 25 or more foreign financial accounts are more complicated than the simplified filing requirements that apply to persons with a financial interest in 25 or more accounts (i.e., because persons with signature authority must also provide identifying information about those who have a financial interest in those accounts, in addition to identifying information about the person making the filing) but states that this information is required in order to ensure that law enforcement receives meaningful information about these accounts. 20 The Preamble also provides further guidance regarding the determination of the value of an account, stating that periodic statements (e.g., monthly) that provide the value in the account at the end of a statement period may be relied on for this purpose where bona fide statements are prepared in the ordinary course of business. APPLICABILITY DATE The Final Regulations apply to FBARs required to be filed by June 30, 2011 with respect to foreign financial accounts maintained in calendar year 2010 and to FBARs for all subsequent calendar years. In addition, filers who properly deferred filing obligations pursuant to IRS Notice may optionally apply the provisions of the Final Regulations in determining their FBAR filing requirements for reports due June 30, 2011, with respect to calendar years beginning before * * * Copyright Sullivan & Cromwell LLP

7 ENDNOTES The Regulations are reflected in 31 C.F.R , which implements 31 U.S.C. 5314, part of the BSA. The FBAR is Form TD-F A detailed discussion of the Proposed Regulations can be found in the Sullivan & Cromwell LLP publication entitled Proposed FinCEN Regulations and IRS Guidance on Foreign Bank and Financial Account Reporting (March 1, 2010), which may be obtained by following the instructions at the end of this publication. Notice , I.R.B (February 26, 2010). 31 C.F.R (a). 31 C.F.R (c). The definition of United States person contained in the FBAR instructions as revised in October 2008 included a person in and doing business in the United States in an attempt to conform more closely to the statutory language of the BSA. Form TD F (Rev. October 2008); 31 U.S.C The prior definition had included only (1) a citizen or resident of the United States, (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust. Form TD F (Rev. July 2000). This language is a minor change from the Proposed Regulations in order to be consistent with the defined terms in 26 U.S.C , which reference the interests of the trust grantor and not the trust settlor. 31 C.F.R (e)(2)(iv). Under the Regulations, both a trust and trustee may be required to file an FBAR. The anti-avoidance rule provides that a U.S. person that causes an entity, including but not limited to a corporation, partnership, or trust, to be created for a purposes of evading this section shall have a financial interest in any bank, securities, or other financial account in a foreign country for which the entity is the owner of record or holder of legal title. Regulations 31 C.F.R (e)(3). 31 C.F.R (c)(3)(ii). 31 C.F.R (f)(1). The Preamble states that the FBAR instructions will be changed to more clearly reflect that the definition of signature authority applies only to individuals. 31 C.F.R (f)(2)(ii). The Preamble goes on to explain that the exception was intentionally limited to officers and employees of entities that were subject to functional regulation by federal agencies that also examine them for compliance with the BSA. 31 C.F.R (f)(2)(iii). The Preamble notes that this exception was included to address the fact that mutual funds do not have employees of their own. 31 C.F.R (f)(2)(iv). The exception also does not apply to employees of U.S. subsidiaries who have signature authority over a U.S. parent s foreign accounts, even where a consolidated report has been filed. We have confirmed in conversations with IRS personnel that this view is consistent with the position of the IRS. We note that the draft instructions to the FBAR included with the Proposed Regulations provide that U.S. persons employed in a foreign country with signature authority over foreign financial accounts owned or maintained by the individual s employer are not required to report the owner -7-

8 of each foreign financial account over which they have signature authority, but rather must provide information about the filer s employer where the form requests information about the owner of the foreign financial account. -8-

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