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Final Foreign Financial Interest Disclosure Requirements – Do They Apply to You?

18 Mar 2011

Under the US Bank Secrecy Act, the US Department of Treasury generally requires that a US person with a financial interest in or signature or other authority over any foreign financial account, reports such interests for years in which the aggregate value of such accounts exceeds $10,000. The reporting form, commonly referred to as an FBAR (Foreign Bank and Financial Account Report), is due on or before 30 June of the succeeding year in which the accounts were held.

In February of 2010 the Financial Crimes Enforcement Network (FinCEN) of the US Department of Treasury released proposed regulations regarding the FBAR filings. Various interested parties submitted comment letters on the proposed regulations, and on 23 February 2011 the final regulations were released with relatively minor changes from the proposed regulations. The final regulations will apply to FBARs for 2010 calendar year (due 30 June 2011) and future years.

The key changes to the current rules include:

  • Clarification of who is subject to FBAR reporting requirements
  • Clarification on what constitutes a foreign financial account and the types of accounts included
  • Clarification on when an individual has signature or other authority
  • Expansion of the consolidated filing option for non-corporate taxpayers.

Persons Subject to FBAR Reporting Requirement
FinCEN revised the definition of a "US Person" to include a citizen or resident of the US, or an entity, including but not limited to a corporation, partnership, trust, or limited liability company, created, organised, or formed under the laws of the US, any state, the District of Columbia, US territories and possessions, and American Indian tribes. US legal permanent residents (i.e., "Green card" holders) are also required to file even if they elected to be treated as non-residents for tax purposes under a relevant treaty. In contrast, non-US persons "in and doing business in the United States," are not required to file the form, which is a favourable change from the proposal that was presented in the October 2008 FBAR instructions.

Exclusion of Certain Foreign Hedge and Private Equity Funds
The final regulations confirm that foreign hedge and private equity funds, whose shares are not available to the general public and do not have a regular net asset value determination and a regular redemption feature, are excluded from the definition of a "mutual fund or similar pooled fund" and therefore, are not considered "foreign financial accounts" subject to the FBAR reporting. However, FinCEN reserved the right to issue future guidance on this issue.

Signature or Other Authority
The final rules define "signature" or "other authority" as the authority of an individual (alone or in conjunction with another) to control the disposition of money, funds or other assets held in a foreign financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.

The "signature" or "other authority" definition under the FBAR rules is only applicable to individuals. Furthermore, FinCEN explained in the preamble to the final rules that the test for determining whether an individual has "signature" or "other authority" over a foreign financial account is whether the foreign financial institution will act upon a direct communication from that individual regarding the disposition of assets in that foreign financial account. Therefore, any individual that has the ability to control the disposition of funds alone or even in conjunction with someone else, and can communicate directly with a foreign financial institution that will act upon such instructions (even if a confirmation from a second person is required), may have to file an FBAR.

Under the final rules, an entity that is a United States person and that owns directly or indirectly more than a 50 percent interest in one or more other entities required to report under these rules will be permitted to file a consolidated report on behalf of itself and such other entities. Previously, only corporations that met the 50 percent ownership requirement above were allowed to file consolidated reports.

Taxand's Take

As the 30 June deadline quickly approaches, you should evaluate how these final regulations may affect your FBAR reporting requirements. At least until the FinCEN decides otherwise, the final rules bring a sigh of relief for certain foreign hedge fund and private equity fund holder that may not have a reporting obligation. In addition, partnerships and other non-corporate entities that were previously unable to take advantage of consolidated filing may now simplify their FBAR reporting if they qualify under the new consolidation rules. However, many US single-member LLCs that were previously exempt from FBAR reporting must now evaluate whether they have US reporting obligations. Furthermore, certain individuals with control, but no signature authority, may now be required to file the FBARs. You should review your current structures to evaluate whether any persons, including corporate officers, may be required to file the FBAR.

Your Taxand contact for further queries is:
Juan Carlos Ferrucho
T. +1 305 704 6670

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Taxand's Take Author