There is a lot of attention these days on big companies (Apple, Google, General Electric, Facebook and others) stashing their earnings overseas in what are considered tax havens to avoid paying U.S. taxes on their corporate income. Some international tax reform proposals have been suggested as to how to get the corporation to either bring this stash back into the U.S. by way of a “repatriation holiday” or “deemed repatriation” or ending the system of tax deferrals.

These rules and proposed tax reforms are for the big players, in the meantime, what is happening with the little guys?

For those of us tax professionals who specialize in international tax and compliance with FATCA, Form 8938 has played a big role since 2011. I wrote in detail about this Form and its filing requirements in my widely read blog post here. Form 8938 had applied to individuals alone and entities had not been considered as falling under the law to report their Specified Foreign Financial Assets (SFFA).

What changed in 2016?

The Treasury Department and the Internal Revenue Service (IRS) adopted § 1.6038D-6 (REG-144339-14) early this year as final. As per the new regs., for tax years beginning after December 31, 2015, certain domestic corporations, partnerships, and trusts that are considered formed or availed of for the purpose of holding, directly or indirectly, specified foreign financial assets must file Form 8938 if the total value of those assets exceeds $50,000 on the last day of the tax year or $75,000 at any time during the tax year.

What is a Specified Domestic Entity {SDE}?

§6038D(f) defines an SDE as “any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets, in the same manner as if such entity were an individual”.

An entity can be a corporation, partnership or a disregarded entity.

In order to be classified as an SDE, the entity has to make a determination every year under Treasury Regulation § 1.6038D-6(b)(2) if:

• At least 50% of the corporation or partnership’s gross income or assets are passive; or
• At least 80% of the corporation or partnership’s gross income or assets are closely held directly, indirectly or constructively by a specified individual on the last day of the corporation’s or partnership’s tax year.

Is A Trust a Specified Domestic Entity?

A trust could be broadly considered an SDE under the new rules if it has one or more specified individuals as current beneficiaries. A “current beneficiary” is generally any person who at any time during the tax year is entitled to, or at the discretion of any person may receive, a distribution from the principal or income of the trust (determined without regard to any power of appointment to the extent that such power remains un-exercised at the end of the tax year).

There are many exceptions to a trust being considered an SDE. One can determine this only after careful reading of the regulations. Some of the excepted trusts include REITs, IRA accounts, § 403(b) or § 457(g) plans. A Grantor Trust is also exempt from reporting SFFAs under the new regs.

The above rules are in effect for Tax Year 2016 that is the coming 2017 tax season. If the above rules affect you and you do not take any action, the penalty for non-disclosure is $10,000 for failure to file the Form 8938 up to a maximum of $50,000.

The tricky and complicated part of tax compliance here is determining if the SDE passes the passive income test, the 80% closely held test, and the total income from all sources.

Please contact your Enrolled Agent or other tax professional if you think you may be impacted by the above changes.