International tax blog (DING!) – Round two

Your Guide to State, Local, Federal, Estate + International Taxation

international taxI’ve given you all plenty of rest from my last international tax blog, “International tax reporting in a nutshell” (Search nutshell on our website or just click here). So here it is (DING!), round two!

Don’t sweat too much, round two is only warning you of two forms, Form 3520 “Annual Return to Report Transactions with Foreign Trusts and Receipts for Certain Foreign Gifts” and the dreaded Form 8621 “Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund” (I know what you’re thinking on the latter… “You’ve already lost me?”, but don’t give up so easily, we’re here to help). There is no time to waste; the bell already went off so let’s get to it!

Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipts for Certain Foreign Gifts – The requirements are exactly that. They put it all in that long form name, but just to clarify, you must file if any one or more of the following applies:

  1. You are the responsible party for reporting a reportable event (see form instructions) that occurred during the current tax year, or you transferred property (this includes cash) to a foreign trust in exchange for an obligation (obligation being basically any form of indebtedness: bonds, notes, account receivable etc.).
  2. You are a U.S. person who is treated as the owner of ANY part of the assets of a foreign trust. Even if no transactions took place during the current year, you are still required to file this form each year by filling out Part II of the form.
  3. You are a U.S. person who received, directly or indirectly, a distribution from a foreign trust during the current tax year. This includes uncompensated use of trust property. It also includes if you or a U.S. person related to you received a loan that could be treated as a distribution to a U.S. person (consult a tax advisor).
  4. You are a U.S. person who received more than $100K from a nonresident alien individual or a foreign estate OR more than $15,671 (This started at $10K and then was indexed) from foreign corporations or foreign partnerships.

Form 8621 Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund – Also known as PFIC’s and QEF’s.

So I guess to understand the filing requirements you must first understand what a PFIC is. A PFIC is a foreign corporation that either generates 75% or more of the corporation’s gross income for its taxable year from passive income OR holds at least 50% of the average assets during the taxable year that either produce passive income or are held for the production of passive income.

Now that everyone is aware (that’s really what we’re going for here), take a look at your foreign investments. Do you know which are PFIC’s just by looking? If the answer is yes, you’re amazing! If the answer is no, well, you’re still amazing, but you’ll need some help with this one. The filing requirements can be found by clicking here or you can avoid the headache by consulting your tax advisor, because at some point you’ve either had to report it or will be required to report it. (That’s assuming you have PFIC’s, of course) Also be careful to review your foreign life insurance, foreign annuities and some foreign pensions, as often, they fall into this category.

My advice to you if you have or think you have foreign reporting requirements is to stop avoiding getting hit, but consult your tax advisor FIRST (This is highly recommended) and THEN jump in the ring together to knock out those reporting issues sooner than later. As the ol’ saying goes, “The best defense is a good offense.” And with that said, (DING!) it’s the end of round two. Catch your breath because there will be more to come.

Chris Morrison, CPA