The U.S. Treasury Department's Financial Crimes Enforcement Network ("FinCEN") issued final regulations regarding foreign financial account reporting on Form TD-F 90-22.1 (also known as the "FBAR") on February 24, 2011. These final regulations revise a version that was proposed on February 26, 2010, and implement the portion of the Bank Secrecy Act authorizing regulations to require U.S. citizens and residents and persons doing business in the United States to keep records and file reports regarding their foreign financial interests.
The final regulations require each U.S. person having financial interests in, or signature or other authority over, bank, securities, or other financial accounts in a foreign country or countries that in the aggregate exceed $10,000 to file an FBAR report with respect to such accounts. The final regulations apply to financial accounts maintained in 2010 and require an FBAR filing by June 30, 2011. The final regulations:
- Expand the scope of trusts that are required to report. The definition of "U.S. person" for entities, including trusts, corporations, partnerships and limited liability companies, continues to be entities that are created, organized or formed under U.S. laws. FinCEN considered and rejected a proposal to exclude trusts that are not classified as "U.S. trusts" for U.S. income tax purposes (i.e. the court and control test pursuant to which a trust is not treated as a "U.S. trust" unless a U.S. court is able to exercise primary supervision over its administration and one or more U.S. persons have the authority to control all its substantial decisions). This means that trusts without U.S. settlors, beneficiaries, fiduciaries or assets, and which do not derive any income that is subject to U.S. income tax, may be subject to FBAR reporting requirements if U.S. laws are designated as the proper law of the trust in the governing instrument. However, the final regulations remove a provision that would have required a U.S. person who established a foreign trust to report the trust's financial accounts merely because a protector was appointed to oversee the trust.
- Reduce the scope of U.S. trust beneficiaries who are required to report. A U.S. person who has a present beneficial interest in 50% or more of a trust's assets or its current income continues to be treated as having a reportable financial interest in the trust's financial accounts. However, the final regulations relieve this person from FBAR reporting if the trust, a trustee or agent of the trust is a U.S. person who files an FBAR report that would otherwise be duplicative. The preamble to the final regulations suggests that a person who is a beneficiary of a fully discretionary trust, where the trust has multiple beneficiaries, none of whom receives 50% or more of the trust's income in any year, is not treated as having a reportable financial interest in the trust's financial accounts.
- Reduce the scope of persons treated as having signature or other authority. The final regulations indicate that only individuals, not entities, have FBAR filing requirements on account of "signature or other authority," and individuals who merely participate in decision-making, or who instruct or supervise persons with signature authority, are not themselves treated as having "signature or other authority" that trigger an FBAR reporting requirement.
- Reduce recordkeeping requirements for officers and employees. Officers and employees of banks and large publicly traded corporations who are required to file an FBAR on account of their signature or other authority over the financial accounts of their employer are relieved from a requirement to personally maintain their employer's financial records. Officers and employees of privately held entities must report their signature authority even if their employer also files reports disclosing the account.
- Reduce filing requirements for persons with multiple accounts. Persons who have a financial interest in 25 or more foreign financial accounts qualify for truncated FBAR reporting. Persons who have signature or other authority but no financial interest in 25 or more financial accounts are required to provide more detailed information with respect to such accounts. This is consistent with FinCEN's indication in the preamble to the final regulations that FBAR reports from individuals with mere signature authority provide an important, independent check on FBAR reporting. This requirement may be particularly burdensome for employees of family offices who oversee many foreign financial accounts.
- Clarify what accounts subject to reporting. The "foreign accounts" subject to FBAR reporting do not include accounts maintained with a financial institution located in the United States, even if those accounts hold foreign securities.
- Clarify that all green card holders are required to report. All legal permanent residents of the United States are treated as U.S. persons who are subject to FBAR reporting requirements, even persons who elect under a tax treaty to be treated as non-residents for U.S. income tax purposes.
- Confirm that U.S. LLCs are required to report. All limited liability companies formed under U.S. laws are treated as U.S. persons who are subject to FBAR reporting requirements, even limited liability companies that are treated as disregarded entities for U.S. tax purposes.
- Investment funds. The final regulations continue to "reserve" on whether hedge funds and private equity funds are reportable foreign financial accounts. However, shares in foreign mutual funds must be reported.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.