Particularly since the US presidential election, some US citizens have moved abroad and others are considering such a move. Tax professionals and trust officers worldwide are fielding questions from these individuals, and how to advise them depends on the particular individual's objectives. Regardless of the length of time spent living outside the United States, the US citizen must be advised to continue all annual US tax reporting.
Even though a trust may be established under US state law and have a US trust company serving as trustee, this does not mean that it is a US domestic trust for income tax purposes. If non-US persons make substantial decisions for the trust, the US-based trust will be classified as a foreign trust under US tax law and, if it has accounts with financial institutions, it must provide certification of its status for Foreign Account Tax Compliance Act purposes.
The Foreign Account Tax Compliance Act (FATCA) is in full swing. Just as international families and their advisers are getting used to myriad requests for FATCA Form W-8 certification forms, more than 90 other countries have indicated that they wish to address tax evasion through a global exchange of financial information by implementing the Common Reporting Standard which, like FATCA, will affect non-US trusts and their trustees.
The Foreign Account Tax Compliance Act (FATCA) requires entity account holders to document their status for US withholding tax purposes and for FATCA due diligence purposes. In the case of a non-US entity account holder that has made a 'check-the-box election' to be disregarded for US income tax purposes, advisers should consider the instructions to the W-8 forms and provide documentation for the disregarded entity's beneficial owner.
The Foreign Account Tax Compliance Act (FATCA) was enacted to prevent abuse of the US voluntary tax compliance system and to address the use of offshore accounts to facilitate tax evasion. The Internal Revenue Service hopes that FATCA will strengthen the integrity of the US voluntary tax compliance system by requiring foreign financial institutions, beginning in 2015, to identify and report information regarding their US account holders.
In order for the Internal Revenue Service (IRS) to gather information on the foreign financial assets of US persons, more than 145,000 financial institutions have registered through the IRS Foreign Account Tax Compliance Act (FATCA) registration system. FATCA requires these financial institutions to report information on their US account holders beginning in 2015 for reporting year 2014.
For a foreign trust with a foreign professional trust company as trustee, compliance with the Foreign Account Tax Compliance Act (FATCA) is relatively straightforward. However, a private trust company that is not in the business of providing trustee services for compensation should assess its options with regard to how it complies with FATCA.
When the United States and the offshore jurisdictions negotiated intergovernmental agreements in order to implement the Foreign Account Tax Compliance Act (FATCA), they added a category of deemed-compliant foreign financial institution that is not in the final FATCA regulations: the trustee-documented trust. Financial institutions have now begun asking trustees of trustee-documented trusts to provide a FATCA certificate for the trust.
Withholding is soon scheduled to begin on certain payments of US source income to non-US entities that are not compliant with the Foreign Account Tax Compliance Act (FATCA). International families and their trustee companies are advised to familiarise themselves with the revised compliance deadlines and review succession planning structures to determine where FATCA withholding could take place and then take the necessary steps to prevent it.
The Internal Revenue Service (IRS) recently posted to its website updated model intergovernmental agreements which it is using to implement the 2010 Foreign Account Tax Compliance Act. Changes to the model agreements highlight the IRS's current thinking as implementation moves forward.
It is time for advisers to international families to assess the classifications of the family office, trust company, trusts and holding companies within the family's succession planning structures under the Foreign Account Tax Compliance Act and any relevant intergovernmental agreements, regardless of whether such entities currently have US owners, beneficiaries or investments.