Reporting foreign trust and estate distributions to U.S. beneficiaries: Part 2

EXECUTIVE SUMMARY

The administration of trusts and estates has become more complex due to the proliferation of trusts with foreign beneficiaries and foreign assets and cross-border transactions. The differences in inheritance laws and the treatment of trust arrangements in common law and civil law countries can cause many difficulties for fiduciaries. The Hague conventions seek to create greater legal certainty in cross-border circumstances, including in the treatment of trusts. Determination of a foreign trust’s or estate’s situs is critical in its administration. Multiple types of situs can exist simultaneously, including administrative, jurisdictional, tax, and locational situs. Qualified domestic trusts (QDOTs) can qualify as foreign trusts. Fiduciary accounting income is the trust or estate income determined using the trust’s or estate’s governing documents and local law. A trust’s or estate’s distributable net income is used to determine the entity’s distribution deduction and the amount and character of the entity’s income that the beneficiary must include in income. Foreign trusts and estates may be subject to information-gathering and information-reporting requirements under the Foreign Account Tax Compliance Act (FATCA) and intergovernmental agreements entered into by the United States with foreign countries to implement FATCA. The income-sourcing rules in tax treaties play a large role in a foreign trust’s or estate’s FATCA reporting and tax withholding compliance. Establishing who is the beneficial owner of income payments or distributions is crucial in determining withholding requirements for foreign trusts or estates.

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This three-part article explains the U.S. tax reporting responsibilities, including determining the proper tax classification of the entity, reporting for income distribution payments, and reporting requirements under the Foreign Account Tax Compliance Act (FATCA), for foreign nongrantor trusts and foreign estates with U.S. beneficiaries. Part 1, in the October issue, explained how to classify a foreign nongrantor trust for the proper U.S. tax treatment, and the tax withholding rules for various income items received from U.S. sources.

Part 2 analyzes legal and beneficial ownership concepts as applied to a trust or estate created and administered in a foreign common law jurisdiction in contrast to a civil law jurisdiction, which generally does not recognize the trust entity concept. Part 2 also discusses the income tax treaty provisions and how they affect the entity’s income reporting, as well as the impact of the FATCA tax regime provisions on the fiduciary’s tax reporting responsibilities. Part 3, in the December issue, will analyze the “net income distribution” payment calculations for U.S. and foreign income beneficiaries, as well as offer a comprehensive example to illustrate the U.S. tax reporting for the foreign entity and its beneficiaries.

Readers should understand the content of Part 1 of this article to fully comprehend the analysis and discussion in Part 2. Estate and trust administration can be complex and challenging, with cross-border transactions requiring tax reporting under various jurisdictional laws and regulations. Having both U.S. and foreign income beneficiaries can significantly complicate the administrative responsibilities for fiduciaries. Part 2 will expand and broaden the fiduciary’s global understanding of today’s foreign trust and foreign estate tax reporting responsibilities in a changing legal and economic environment.

In recent years, international regulatory and tax-compliance global initiatives have raised awareness of and attention to the tax obligations affecting mobile owners of wealth and international financial institutions that operate in multiple jurisdictions. Traditionally, the fiduciary’s duties and responsibility have been to protect the beneficiary’s interest, being charged with legal responsibilities involving prudent care, astute guardianship, and stewardship. Today’s fiduciary is also expected to have and to exercise the ability to process volumes of complex information, while balancing different sources of professional tax and financial advice. Simultaneously, a successful fiduciary respects the dynamics within multiple generations of family members, while considering the nuances that are often deeply embedded within each member’s culture.

Straightforward wills are becoming commoditized so that they are now widely available at low cost, while estate planning is becoming increasingly complex, with a significantly more sophisticated entity structure that requires greater collaboration among professional advisers.¹ The issues confronting today’s fiduciaries are not only ones of tax, residence, and domicile. The major legal systems dominate global fiduciary administrations: common law, civil law, and religious law.

People in the Persian Gulf states generally follow Islamic law or Sharia, a religious law that is not tied to a physical location, except in Saudi Arabia, where it is the law of the land.² Families from the Gulf states tend to be close-knit and give the well-being of the family group priority.³ In contrast, the culture in countries using the common law legal system, including the United Kingdom, the United States, Canada, and Australia, tends to be more focused on the individual. Common law legal systems depend on judicial decisions to interpret and, in many cases, create law. Civil law countries, which follow statutory or codified systems, make up most of the other countries in the world. Countries with civil codes tend to have cultures that follow the laws like a rulebook rather than a guide.⁴

Inheritance laws in civil law jurisdictions are very different from those in common law jurisdictions. For example, common law principles allow older generations to disinherit younger generations or give them unequal shares of property in their trust instrument and/or will. In contrast, civil law countries follow forced-heirship principles, which guarantee that younger generations will inherit a certain share of a parent’s assets. As a consequence, today’s mobile society, which sometimes includes marriages that mix different cultures, complicates traditional estate and trust administration.

Advising clients in ‘private international law’

Difficulties can develop when a trust is administered in a different jurisdiction from where it was created or established. The trust is a legal entity, which can only succeed administratively in a judicial environment where the jurisdiction recognizes the trust under common law principles. In countries where those legal principles are not recognized, the court will not find a rule for conflict of laws according to which it can determine the laws that apply to the trust. For example, even if a judge concludes that a common law country’s law applies, it may be difficult to determine how to translate into the non-common law country’s own law(s) the legal effects that will result from the trust’s facts.⁵ With these problems confronting fiduciaries and beneficiaries, the Hague Conference on Private International Law (HCCH) developed an international convention on the laws that apply to trusts and whether they are recognized, in 1982. The Hague trust convention (“Convention on the Law Applicable to Trusts and on Their Recognition”) was adopted on July 1, 1985.

Application of the Hague conventions

The HCCH is a global intergovernmental organization that has as its mission the progressive unification of the rules that various countries have ­adopted to resolve differences among their legal systems.⁶ Its objectives involve developing international approaches to court jurisdiction, jurisdictional law, and the recognition and enforcement of foreign judgments in a range of areas from banking laws to matters of marriage and personal status.⁷ The HCCH has 83 member states from around the world, and is attracting nonmember countries that are becoming parties to the Hague conventions.⁸

Benefits of the Hague conventions

The Hague conventions and their articles create greater legal certainty in difficult cross-border circumstances. For example, under the conventions, a will executed by a testator in accordance with Swedish law will not be deemed invalid in Japan just because it is in a different form.⁹ To meet its objectives for greater global legal certainty, the HCCH’s Hague conventions must be more widely adopted by additional foreign jurisdictions. Some progress has been made in this ratification process over the last several years.

In terms of specific articles in the convention on trusts, for example, Article 6 stipulates that the legal system that applies to the trust is that which the settlor chose. The settlor’s choice of legal system must be made either expressly or by implication in the terms of the trust instrument.¹⁰ If not, Article 7 provides that the trust is governed by the legal system with which it is most closely connected. Under those circumstances, the following facts must be analyzed to ascertain the legal jurisdiction that applies to the trust:

• The location of the trust administration as designated by the settlor;
• The location(s) of the trust’s assets;
• The trustee’s place of residence or business location;
• The objectives or purposes of the trust; and
• The tax jurisdictional laws that apply where each asset is located.¹¹

However, all questions concerning the law of succession must be dealt with according to the law of the state (country of jurisdiction) to which the testator or settlor belonged (his or her domicile) at death.¹²

Nevertheless, the recognition of a trust’s valid legal establishment according to a foreign jurisdiction’s laws has its limits. According to Article 15 of the convention, a trust’s legal status is not recognized insofar as mandatory provisions of the legal order, as designated by the conflict of rules of the forum, would be violated.¹³ For example, if assets located in Japan or Germany (civil law jurisdictions) were alleged to have become property of the trust, a Japanese or German judge must apply mandatory provisions of Japanese or German property law to determine that fact of law.¹⁴

Guarded optimism in applying the Hague convention

Recently more success stories have occurred in some civil law jurisdictions, and even in other common law jurisdictions, in recognizing the trust and its legal system applications. Two primary reasons point to these successful results:

1. The Hague trust convention creates a “common framework” for civil law countries that desire to formally recognize the trust and its legal applications, thus avoiding the question of how the trust will be characterized under local law, an issue that can require complex analysis and legal rulings.¹⁵
2. The convention provides a “term of reference” for the courts in countries that do not formally recognize trusts, but are presented with the responsibility to determine the application of the local jurisdictional laws, to make judicial decisions about a trust.¹⁶

The challenges under the above circumstances will continue to confront professionals and fiduciaries. The quality of the local service providers, the professional team members, and the judiciary, if needed, often determines the final outcome. The jurisdictional rules and enforcing judgments are additional essential criteria for all parties to consider in this process.

Other challenges for trusts in foreign jurisdictions

Trust administration can often involve multiple jurisdictions. A trust, for example, can be created under the laws of Country A, but be administered by a trustee in Country B (and perhaps also Country C). At the same time, the trust can be a tax resident in Country D. These circumstances result in a legal dilemma and raise questions: What law applies to what issues? One question might be whether the trust property in the trust declaration was “alienable” (transferable from the settlor to the trustee’s control at the settlor’s death) “in some form” according to the law of situs.¹⁷ Subject to those qualifications, the “conflicts rules” in the Hague convention would determine the law governing the validity of the trust and its terms.¹⁸

International wills

Some estate planning attorneys advise the testator to draft a supplemental will to cover only the property owned in a specific foreign jurisdiction (i.e., a foreign codicil to a domestic will). Care is recommended in preparing a codicil because of the risk of revocation of any portion of the original domiciliary will. A supplemental will usually designates the immovable property located in the foreign country, such as real property.¹⁹

An alternative is to execute an “international will” to provide for the testator’s foreign ownership of the property. The international will, when drafted to meet the requirements of the International Institute for the Unification of Private Law (UNIDROIT), will be valid in any jurisdiction that has signed the Uniform International Wills Act. Treaty signatories include several foreign countries, as well as the United States, 23 states, and the District of Columbia.²⁰

However, owning foreign property in a civil law country might make such a codicil unnecessary to complete a bequest to a beneficiary, if the property vests in the decedent’s heirs immediately upon the testator’s death. Qualified and experienced legal advice is the best option before proceeding with international estate planning and drafting the necessary legal documents to safeguard foreign assets. Practitioners should exercise caution in coordinating the “situs” will with the nonresident’s primary will to be sure both are valid and enforceable. Mistakes can often result in the accidental revocation of either will.²¹

Achieving a global understanding of trust situs

One of the objectives of this article is to educate the reader on the nuances of estate and trust administration with a global perspective. The proper income tax reporting of the foreign trust or foreign estate is directly related to these legal issues previously discussed. Determination of the foreign estate’s or trust’s situsis critical. Multiple types of situs can exist simultaneously, including administrative situs, jurisdictional situs, tax situs, and locational situs.

Administrative situs

Administrative situs typically refers to the jurisdiction where the trust is principally administered and is considered by most professionals as the most significant type of situs when referring to the entity’s situs. Legal guidance provides rules to determine the administrative situs of a trust. For example, the Uniform Trust Code (adapted wholly or partially by 29 states and Washington, D.C.)²² provides that a trust instrument’s selection of administrative situs will control, if the trustee’s principal place of business is located in, or a trustee is a resident of, the designated jurisdiction (or at least part of the administration takes place in the designated jurisdiction).²³ If these criteria are met, practitioners can be more confident that a trust’s administrative situs and its applicable benefits are legally satisfied by finding clear statutory and judicial law in the desired jurisdiction.²⁴

Jurisdictional, tax, and locational situs

Jurisdictional situs refers to the country whose courts have jurisdiction to hear matters regarding the trust. The location of a trust’s principal place of administration will ordinarily determine which court(s) have primary supervision, if not exclusive jurisdiction, over the trust, and all questions pertaining to the trust’s administration. The trust’s tax situs is the jurisdiction where the entity’s income is taxable. This determination often depends on how the jurisdiction’s tax laws classify a trust or estate as a resident entity. The locational situs of a trust holding intangible assets usually is considered to be the location of the trust’s administrative situs. Real property, however, usually is treated as located in the jurisdiction of the property’s physical location.²⁵

For U.S. tax purposes, assets treated as having a U.S. situs include:

• Real and tangible personal property located in the United States;
• Shares of stock issued by U.S. corporations (for estate tax purposes and the dividend income paid on the shares, but not for gift tax purposes (Sec. 2104) (result: A nonresident alien (NRA) settlor could have gifted the stock during his or her lifetime with no U.S. transfer tax consequences);
• Deposits with a U.S. branch of a foreign corporation that is engaged in the commercial banking business (Sec. 2104);
• Debt obligations, if they are debts of a U.S. citizen or resident (Sec. 2104).

However, ordinary U.S. bank accounts or money-market accounts are generally not treated as U.S. situs property (Sec. 2105).

While it is possible to have an administrative trustee perform his or her duties in a desired jurisdiction, in some foreign trust administrations, trustee powers such as investment and beneficiary distribution authority can be shared or delegated to a co-trustee or “trust protector” in another jurisdiction. In those cases, the fiduciaries share in the “control” function, as discussed in Part 1 of this article.

Complications involving ancillary estate administrations

This author is familiar with some real-life cases where former U.S. residents retired from U.S. employers and returned to their foreign home countries, where they subsequently died. In most of these cases, the decedent did not formalize his or her estate plan properly before death. In these cases, some of the assets remained in the United States, and some were located in the home country. In addition, the will, which was drafted in the decedent’s home country, designated both U.S. and foreign beneficiaries of the estate, but it did not designate a U.S. executor to administer the U.S. assets. These circumstances presented many challenges for the beneficiaries and the decedent’s executor in the home country.

In these cases, the U.S. beneficiaries, with the executor’s approval, should seek a knowledgeable law firm to petition the U.S. probate court to establish an “ancillary estate administration” to administer these U.S. assets (and subsequent distributions to the beneficiaries after the probate court approves those distributions). An “ancillary administration” is an estate administration where the decedent has property, but where the decedent was not domiciled.²⁶

The probate court’s ancillary proceeding would include the appointment of a designated administrator (as no will existed to designate such a U.S. representative for the estate) who would manage the estate’s U.S. assets and liabilities (i.e., resulting in an estate inventory). These cases might also have an “administrator with will annexed,” which means an administrator appointed after the executor named in the will has refused or is unable to act.²⁷

Many challenges may face the accounting firm engaged to assist the administrator in these cases. A strong international tax and forensic accounting background would give the engagement members an advantage to assist in the inventory discovery process and formulation of a plan of action. A priority would be to determine whether the decedent had successfully expatriated under U.S. immigration and tax laws. The possibility that the decedent had not completed expatriation as required might result in possible tax and penalty assessments that would burden the estate’s liquid assets, expand the timetable of the estate’s administration, and diminish future beneficiary distributions. Two recent tax court cases involving the same taxpayer²⁸ demonstrate the importance of getting both the U.S. immigration and tax law aspects of an expatriation right.²⁹ The first decision “firmly shuts the door on informal abandonment of U.S. residency.”³⁰

Complications in administering estate assets located in both a civil law and a common law jurisdiction

To demonstrate the complexities of administering an estate with assets located in a civil law and a common law jurisdiction, consider the common occurrence of Quebec residents who own property in the United States. Quebec, which adopted the French legal system of its origins, follows civil law, while the rest of Canada follows common law. In most civil law jurisdictions, the decedent’s property is automatically and immediately transferred to the heirs and legatees, with title transferred upon death, according to the will. This legal concept comes from the French customary law principle: le mort saisit le vif (the dead gives possession to the living).³¹

When a Quebec decedent’s estate assets are located in a jurisdiction where the administrator must be appointed by the court, the Quebec liquidator (formerly referred to as the executor) will most likely encounter jurisdictional law problems.³² Under Quebec succession law, while the heirs have control and possession of the estate property from the moment of death, the liquidator exercises control and possession of the property for the period of administration to liquidate the estate and satisfy certain debts at the decedent’s death.³³ The liquidator may face restrictions in the foreign jurisdiction with regard to status and capacity, often requiring a bond or surety on the liquidator’s behalf.³⁴

If, for example, the Quebec decedent’s estate included real property located in Florida, a probate proceeding would be commenced in Florida, and the Florida court would appoint a personal representative or administrator. Although the “notarial will” is the most common and widely used estate document in Quebec, it is not generally accepted in common law jurisdiction locations, such as Florida.³⁵ (A notarial will avoids probate in civil law jurisdictions because notaries there are afforded judicial-like powers.) For a Quebec estate with a notarial will, to deal with property in Florida, the estate will have to obtain letters of verification from the Quebec court to release estate assets in a common law jurisdiction.

Unfortunately, many decedents with assets located in multiple jurisdictions do not engage in proper estate planning with advice from qualified professionals before their death. In those cases, executors face fiduciary risks in administering the estate, given the divergence between the civil law and common law legal systems.

Perils of estate administration in both a civil law and a common law jurisdiction

Further examples of the challenges facing fiduciaries include being confronted with requirements to satisfy tax obligations in a common law jurisdiction as well as inheritance tax obligations owed by the beneficiaries in a civil law jurisdiction. In a U.K. probate administration, for example, where the inheritance tax (IHT) exceeds the value of the U.K. estate, but there are foreign assets under the control of the executor that are sufficient to cover the shortfall, should the executor remit funds from the foreign assets located in the foreign jurisdiction to cover the IHT obligations?³⁶

These circumstances create a number of legal and accounting issues to resolve in both jurisdictions. Should the U.K. executor expect the executor administering assets in the other jurisdiction to remit funds to pay the IHT? Should the foreign executor who has tax withholding responsibilities for the foreign beneficiaries do so? Doing so could subject the foreign executor to a claim of a “breach of trust” to pay tax that cannot be enforced against him or her.³⁷

The general rule is that a will should be construed in accordance with the system or laws the testator intended, which presumes that the law of the testator’s domicile when the will was executed applies. However, the will may stipulate that a specific jurisdiction and its laws should apply to settle the estate. The executors may need to demonstrate their fiduciary responsibilities by carefully communicating with the beneficiaries, including various calculations of different scenarios affecting their beneficial interests.³⁸ Careful drafting of the estate documents is prudent and generally aids the executor; however, it can be difficult to anticipate what challenges will develop.

Foreign trusts established under Delaware law

As explained in Part 1 of this article, U.S. tax laws presume that trusts are foreign trusts unless both the “control test” and the “court test” are met. In many cases, a settlor has established a foreign trust under Delaware law (because of the state’s favorable trust laws and court system) by entrusting decision-making powers to a non-U.S. person, usually designated as the trust protector. In those cases, the trust fails the control test because the designated Delaware administrative trustee does not control all the trust’s substantial decisions.

Although, before 1997, the statute³⁹ for determining whether a trust is domestic or foreign referred to “fiduciaries,” if the “person” (a non-U.S. person such as a trust protector) has the power to control substantial decisions, the person is treated as a fiduciary for purposes of the current statute (as referred to in Part 1). Substantial decisions include:

• Changing the trust situs;
• Changing beneficiaries under certain circumstances;
• Allocating receipts to income or principal; and
• Adding or removing a trustee.

Having a trust protector can be advantageous because of the greater oversight and coordination of the trust’s fiduciaries. In addition, the protector will have more flexibility to handle future situations, better monitor trust administration according to the settlor’s original intent, and promote privacy and confidentiality of the entity’s affairs.

QDOTs can qualify as foreign trusts

At first glance, it would appear that a Sec. 2056A qualified domestic trust (QDOT) would not qualify as a foreign trust because of its strict statutory requirements. Generally, a surviving spouse must be a U.S. citizen for property transferred to the surviving spouse from a decedent spouse’s estate to be eligible for the marital deduction.⁴⁰ This requirement was enacted to prevent a noncitizen surviving spouse from transferring the inherited assets out of the United States, thereby avoiding a U.S. estate tax liability. An exception allows the deferral of estate tax for property transferred to a surviving spouse who is a non-U.S. citizen, if the property passes to a QDOT,⁴¹ which the executor has timely elected to treat as a QDOT.⁴²

The QDOT tax rules do not prohibit the non-U.S. citizen spouse from serving as a co-trustee of the QDOT. However, the other co-trustee must be a U.S. person (or U.S. institution) who is responsible for withholding the estate tax imposed upon QDOT distributions to the surviving spouse.⁴³ If the non-U.S. citizen spouse is a co-trustee who has the authority to control some or all substantial decisions concerning the trust and becomes a non-U.S. resident, the QDOT may be classified as a foreign trust.⁴⁴ Distributions of income from the QDOT to the surviving spouse are not subject to the U.S. deferred estate tax.⁴⁵ However, a more immediate concern would be two income tax consequences:

1. By becoming a foreign trust, immediate capital gain recognition under Sec. 684(a) could be triggered on each asset’s appreciation (losses are not allowed to offset gains). If a trust that is not a foreign trust becomes one, the trust is treated for Sec. 684(c) purposes as having transferred, immediately before becoming a foreign trust, all of its assets to a foreign trust.
2. The additional tax on any distributions to the surviving spouse that include undistributed net income of a prior tax year under Sec. 665.

The U.S. trustee is responsible, and may be personally liable, as a withholding agent for withholding taxes on that income and the tax reporting to the IRS on trust distributions to the nonresident noncitizen surviving spouse.⁴⁶ Obviously, care must be exercised in those circumstances.

Why fiduciary accounting income is important

While this article’s purpose is to explain U.S. laws on distributions to U.S. beneficiaries from foreign trusts and foreign estates (i.e., understanding the tax concepts), fiduciary accounting income is an accounting and economic concept that has been incorporated into Subchapter J of the Code. In most jurisdictions, including foreign ones, a body of laws has been enacted that frames the substance of the drafting of the testamentary trust instrument’s terms. Typically, a body of case law exists in each jurisdiction that defines the rights and responsibilities of each party. The fiduciary’s primary responsibility is to maintain accurate records and prepare regular fiduciary accountings, which enable the fiduciary to plan future transactions and prepare tax returns for the entity and its beneficiaries.

Fiduciary accounting income (FAI) is the trust or estate income determined using the governing instrument (i.e., in a will or trust instrument) and applicable local jurisdictional law. Thus, the economic interests of the income and remainder beneficiaries are determined by providing a means of allocating receipts and disbursements between the entity’s income, which may be accumulated or distributed currently to the income beneficiaries, and principal, which will subsequently be distributed to the remainder beneficiaries. FAI is not a tax concept like “taxable income,” “gross income,” and “distributable net income.”

Subchapter J and Subchapter N of the Code determine the proper tax treatment of U.S.-source income for foreign trusts and foreign estates. Although FAI is not a tax concept, domestic complex trusts must disclose it on Schedule B, Income Distribution Deduction, of Form 1041, U.S. Income Tax Return for Trusts and Estates. However, FAI becomes more important for a foreign trust that does not distribute all of each current year’s distributable net income (DNI) to its U.S. income beneficiaries. Any resulting undistributed net income, when distributed to the U.S. income beneficiaries in a subsequent tax year, becomes subject to the “throwback rules” and “interest charge rules” discussed in Parts 1 and 3 of this article.FAI, as determined under the trust instrument and local law, provides documentary evidence of each tax year’s current net income. Distributions to the U.S. beneficiaries are measured with the calculated net income share to each beneficiary to determine whether all of the net income has been distributed for the tax year.

Importance of distributable net income

Under U.S. tax laws DNI governs the tax treatment for trusts and estates (including foreign trusts and foreign estates) on key tax issues:

1. DNI calculation determines the upper limit on the amount of the income distribution deduction that is allowable by the trust (simple and complex) or estate in computing the taxable income of the entity;⁴⁷
2. DNI determines the maximum amount that each income beneficiary will have to include in his or her gross income;⁴⁸ and
3. DNI determines the “character of the income” reportable in each income beneficiary’s gross income for the tax year.⁴⁹

Under the U.S. tax rules, the limitation on the entity’s income distribution deduction applies even if a trust or estate distributes an amount greater than DNI to the beneficiaries. For example, a simple trust could distribute an amount greater than DNI in a tax year if FAI is greater than DNI (e.g., if tax-deductible trustee fees are allocated to principal, not income, under the terms of the trust instrument for FAI purposes). Estates or complex trusts could make distributions in excess of DNI because these entities are classified as ones that can make distributions of principal (corpus). However, the entity’s income distribution deduction is limited to the DNI calculation.

The amount included in the income beneficiary’s gross income may be less, but never more, than his or her allocated portion of DNI, even if all income is required to be distributed in the current tax year. Gross income distributed by an estate or trust to its income beneficiaries generally retains the “same character” in the beneficiary’s hands, as it was accounted for to the estate or trust.⁵⁰ Therefore, DNI must be reported by “class of income,” net of expenses, before the net income can be allocated to the beneficiaries. Deductions directly attributable to one class of income are allocated to that income. If the direct expenses exceed the related income, they can be allocated to other classes of income. Indirect expenses may be allocated to any item of income included in DNI, if a reasonable portion is allocated to nontaxable income.⁵¹

DNI tax reporting for foreign trusts

The proper computation of DNI for foreign trusts differs from domestic trusts under Sec. 643(a). Generally, the DNI of a U.S. domestic nongrantor trust for a tax year is equal to its taxable income for that tax year, adjusted by adding to taxable income:

1. The amount deducted as a personal exemption;
2. The amount of its tax-exempt income; and
3. The amount of the trust’s income distribution deduction, and by subtracting from taxable income: The trust’s capital gains, except to the extent that they are “paid, credited, or required to be distributed to any beneficiary during the tax year.”⁵²

A foreign nongrantor trust’s DNI includes capital gains, however,⁵³and:

• The amount of its income from non-U.S. sources (i.e., foreign income), reduced by amounts that would be deductible, but for the disallowance of certain deductions in Sec. 265(a)(1);⁵⁴
• Gross income from U.S. sources that would be determined without income tax treaty exemption provisions under Sec. 894.⁵⁵ (Under Sec. 894(b), for purposes of applying an exemption from, or reduction of, any tax provided by any U.S. tax treaty with respect to any income that is not effectively connected income (ECI), an NRA (i.e., foreign nongrantor trust) is deemed not to have a permanent establishment in the United States at any time during the tax year. For passthrough entities, such as trusts and estates, the tax status of the person or entity that is taxable on the income (e.g., the beneficiary or the trust in the case of the nongrantor trust) determines who is eligible for the treaty benefits).)

Note: The special DNI calculation rules applicable to foreign nongrantor trusts do not apply to foreign estates. Capital gains and foreign-source income are not included in a foreign estate’s DNI for U.S. tax purposes.

The trust instrument or local law may require that specific classes of trust income be allocated to specific beneficiaries. If those requirements have economic substance, independent of the tax consequences, the amounts the beneficiaries received retain their character for income allocation purposes.⁵⁶

Foreign currency conversion issues

As explained in the Tax Adviser article, “Reporting Trust and Estate Distributions to Foreign Beneficiaries: Part 1,”⁵⁷ the typical beneficiary wants a cash distribution to be paid in his or her functional currency. To enhance the benefits of the currency exchange, a prudent fiduciary needs to know the tax reporting issues. Executing these conversion procedures successfully can maximize potential gains and minimize potential losses in currency conversion amounts. The above-referenced article provides more detailed guidance in these matters.

FATCA’s ramifications for foreign trusts and foreign estates

In 2010, FATCA⁵⁸ added Chapter 4 of Subtitle A (comprising Secs. 1471 to 1474) to the Code. FATCA established a new tax withholding and information-reporting regime that supplements the Chapter 3 rules under Secs. 1441 through 1446.⁵⁹ FATCA requires foreign financial institutions (FFIs) and nonfinancial foreign entities (NFFEs) to identify and disclose their U.S. accounts and substantial U.S. owners, or be subject to a 30% withholding tax on certain U.S.-source income payments to them. The 30% withholding is required on “withholdable payments”⁶⁰ made after June 30, 2014, to foreign entities, which includes foreign trusts, unless the payee qualifies for an exemption.⁶¹

Payments to accounts owned by foreign estates are not subject to FATCA.⁶² However, fiduciaries of foreign estates have FATCA tax reporting responsibilities to identify and disclose information, like foreign trust fiduciaries. The author recommends that readers review the article, “FATCA: A New World of Terminology and Compliance,”⁶³ for a detailed list of withholdable payments and exceptions from those rules.

Final regulations in T.D. 9610 impose significant information-gathering and information-reporting requirements on fiduciaries when:

1. U.S. tax resident beneficiaries hold trust interests in assets outside of the United States; and
2. Non-U.S. residents hold trust interests in assets inside the United States, if they are tax residents of a foreign country subject to a Model 1 or 2 intergovernmental agreement (IGA).

A foreign trust can be classified as an FFI if the trust’s income is primarily from passive investments and is professionally managed,⁶⁴ as illustrated in Regs. Sec. 1.1471-5(e)(4)(v). Professional management includes a trust company or a non-trust company trustee that hires a professional investment manager.⁶⁵ If the trust is an FFI, any tax overwithholding is generally not refundable.⁶⁶

An NFFE foreign trust is not professionally managed and has primarily passive investment income. Most NFFEs can avoid FATCA withholding by either:

• Certifying with the withholding agent that no U.S. beneficiary owns or is deemed to own 10% or greater of the entity’s beneficial interests; or
• Disclosing the names and TIN of each substantial U.S. owner.⁶⁷ Related persons are aggregated for purposes of the ownership test.⁶⁸

Unlike an FFI, an NFFE can file for a tax refund for any overwithheld tax. However, an NFFE nongrantor trust may have difficulty in obtaining refunds.⁶⁹ Electing to be treated as a “direct reporting NFFE” (i.e., registering with the IRS and filing annual FATCA reports, but not entering into an FFI agreement) will improve the likelihood of obtaining tax refunds.⁷⁰ An NFFE beneficial interest owner can claim a tax refund by crediting tax amounts withheld under FATCA against his or her U.S. tax liability by filing a U.S. income tax return with all the required information for the tax year.⁷¹

Effect of IGAs on FATCA reporting

The United States has entered into IGAs or reached agreement with more than 50 other countries.⁷² Several FFIs had difficulties complying with FATCA reporting requirements because of the complexities of bank secrecy laws, sovereignty issues, and local statute-of-limitation issues. The resulting IGAs contain provisions enabling easier FATCA compliance for those jurisdictions.

Model 1 and Model 2 IGAs implement FATCA tax information gathering differently. FFIs in Model 1 jurisdictions report directly to tax authorities in the FATCA/IGA jurisdiction, which is then shared with IRS officials.⁷³ This tax information is exchanged under existing tax treaties or tax information exchange agreements with the IRS. As a result, the FFI in those jurisdictions is generally not required to withhold tax on payments made to nonparticipating FFIs (i.e., the FFI has no FATCA agreement with the IRS) or recalcitrant account holders, if the tax information is reported as required under the IGA terms. A trust resident in a Model 1 IGA jurisdiction is not obligated to assume withholding responsibilities on withholdable payments made to nonparticipating FFIs or recalcitrant account holders.⁷⁴ The entity, however, is required to report tax information to the payer of the U.S.-source income payment to facilitate tax withholding if the need arises.

With Model 2 IGAs, FFIs report directly to the IRS. Each registers with the IRS as a participating FFI, but the agreement with the IRS enables the FFI to not withhold on payments to recalcitrant account holders if the FFI complies with the IGA.⁷⁵ The Model 2 FFI is required to file IRS Form 8966, FATCA Report, containing information about any nonconsenting or noncompliant U.S. account holders. The form is filed on a calendar-year basis and is due March 31 of each tax year. A trust is deemed compliant if it complies with the IGA requirements.

Application of U.S. tax treaties

The income-sourcing rules have a direct correlation with the tax withholding requirements under FATCA and IGA tax reporting compliance. In general, income-sourcing rules (as stipulated in each treaty’s provisions with each U.S. tax treaty partner) serve as the basic element of international taxation. First, the income-sourcing rules establish a tax jurisdiction’s authoritative right to tax specific income derived within the jurisdiction by a taxpayer that may otherwise not have a taxable nexus with the jurisdiction. Second, income-sourcing rules were established with the objective of protecting taxpayers from double taxation on the same income item in both the United States and the foreign jurisdiction. In addition to mismatches or lack of clarity between the U.S. statutory source rules and related tax treaty provisions (or lack thereof), complexity abounds, as the United States is not the only jurisdiction to tax its residents on their worldwide income.

With regard to the taxation for foreign nongrantor trusts and foreign estates, as well as nonresident beneficiaries, under U.S. statutory source rules (specifically Secs. 861 through 875 and related Treasury regulations), certain U.S.-source FDAP income, ECI, and gains on dispositions of U.S. real property interests are taxable for U.S. tax purposes (as analyzed in Part 1 of this article). The specific provisions of each tax treaty should be carefully interpreted in its own context because tax laws vary from country to country. The tax benefits derived from each tax treaty (such as a reduced withholding tax rate or full tax exemption) are generally available to taxpayers who are residents of one or both “Contracting States” named in the treaty. A “resident of a Contracting State” refers to a taxpayer who is liable for taxation under that country’s laws by reason of residence, domicile, citizenship, or place of management (Article 4 of the U.S. Model Income Tax Convention). In the case of estates and nongrantor trusts, the tax status of the person or entity who is taxable on the income (e.g., the beneficiary or the entity) determines who is eligible for the treaty benefits, such as a reduced withholding tax rate.

With regard to criminal mutual legal assistance treaties (MLATs), the United States is more receptive to enforcing foreign tax jurisdiction judgments in criminal cases under its obligations in those treaties.⁷⁶ Despite these treaties, it remains difficult for foreign tax authorities to recover their taxpayers’ assets located in the United States in civil law cases. Thus, even if FATCA partner countries obtained tax information regarding their residents’ U.S. financial assets, seizing those assets to satisfy domestic civil law judgment liabilities would be difficult.⁷⁷ Generally, the United States currently has treaty obligations to enforce foreign civil law judgments with five countries: Canada, Denmark, France, the Netherlands, and Sweden.⁷⁸ Essentially a common law rule, the “revenue rule,” which prohibits enforcing foreign tax judgments in the United States, prevents U.S. courts from enforcing foreign civil law tax judgments.⁷⁹

Disclosure of a treaty-based position

A foreign estate or foreign trust fiduciary may have justification when reporting a particular income source item to take a tax position that any U.S. tax does not apply or is reduced by a U.S. treaty provision (a “treaty-based position”) that is in force. That position should be disclosed on Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), and attached to the entity’s U.S. fiduciary income tax return. Filing Form 8833 is not required to report a reduced rate of tax withholding for non-effectively connected income (i.e., FDAP income).

Beneficial owner of income payments and documentation requirements

Withholding agents with Chapter 3 tax withholding responsibilities and FFIs with Chapter 4 withholding responsibilities are required to obtain certain documentation and tax information forms to determine the beneficial owner of specific income item payments that come under their control and supervision. For Chapter 3 requirements, a foreign complex trust or foreign estate is generally considered to be the beneficial owner of the income payments to it.⁸⁰ An income payment made to a foreign complex trust or foreign estate may be treated as such if the withholding agent can reliably associate the payment with a withholding certificate or documentary evidence that establishes the foreign entity as the beneficial owner.

Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities), is required to be completed by foreign estate and trust entities to document their tax status for both Chapter 3 and Chapter 4 purposes for FDAP payments, as well as certain other Code provisions. A passive NFFE must list all substantial U.S. owners on the Form W-8BEN-E that is provided to the withholding agent (or certify on the document that it has no such U.S. owners).⁸¹ Form W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States, is a certificate provided by the foreign entity to the applicable withholding agent who controls ECI payments in the event that the foreign entity is the beneficial owner of income effectively connected with a U.S. trade or business.⁸² These withholding certificates also serve as documentary evidence to establish evidence of residence for claiming any applicable tax treaty benefit.

The IRS has issued final regulations regarding tax withholding on certain U.S.-source income payments to foreign persons, information reporting, and portfolio interest income paid to NRAs.⁸³ A withholding agent may treat a payment as if it was made to a foreign complex trust or foreign estate, if the agent can reliably associate the payment with a withholding information certificate or documentary evidence that establishes that entity as the beneficial owner.⁸⁴ However, for Chapter 3 tax purposes, a foreign simple trust is not treated as the beneficial owner or payee of the income payment. Under these circumstances (as properly verified with documentary evidence), the withholding agent can reliably associate a payment with a valid Form W-9, Request for Taxpayer Identification Number and Certification, from a U.S. beneficiary payee or Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), if an NRA beneficiary, if applicable, as the payee.⁸⁵ Beneficial ownership of income is determined under Sec. 7701(l) and other U.S. tax principles, including those governing whether a transaction is a conduit transaction.⁸⁶

Fiduciaries, beneficiaries, and practitioners who are engaged in international estate or trust administrative activities achieve best results by staying informed of these tax reporting responsibilities and tax withholding requirements and acting accordingly. Maintaining accurate and timely documentation as facts and circumstances change is imperative. Potential risks of penalties for Chapter 3 and Chapter 4 noncompliance should be motivation for active communication and stewardship by all parties.

Fiduciary responsibilities and U.S. tax representation

With regard to foreign estate and trust administration and its tax reporting obligations, the ultimate responsibility falls on the fiduciaries who are faced with complying with laws in more than one tax jurisdiction. Because these laws may change without notice, fiduciaries face added pressure to seek knowledge and professional advice to formulate best practices and respond successfully.

If the fiduciary resides in a foreign jurisdiction and/or the foreign trust does not have an office or permanent establishment in the United States, it would be prudent for the fiduciary to authorize a U.S. agent to act on all U.S. tax matters needing attention. A U.S. agent is a U.S. person that has a binding contract with the foreign trust (i.e., trustee) that allows the U.S. person to act as the trust’s authorized U.S. agent in complying with Sec. 7602 (examination of books, records, and witnesses), Sec. 7604 (enforcement of summons), and Sec. 7603 (service of summons). The authorization applies to any request to examine records or produce testimony that may be relevant to the U.S. income tax treatment of any transaction with the reporting trust entity or with respect to any summons for those records or testimony.⁸⁷ The agency relationship must be established by the time that the trust’s fiduciary income tax return is filed for the relevant tax year. Also, the authorization must remain valid during the statute-of-limitation period for each relevant tax year.

International ‘hot button’ issues facing fiduciaries today

In the past few years, practitioners and fiduciaries have witnessed a new age of tax transparency, initiated with the FATCA tax regime, with a globally coordinated approach. Recently European Union countries have led the Organisation for Economic Co-operation and Development (OECD) and Global Forum on Transparency and Exchange of Information for Tax Purposes, with the objective of eliminating aggressive tax avoidance, as well as illegal tax evasion. The terms “tax evasion” and “tax avoidance” are considered by some jurisdictions to be the same, distorting what has historically been a clear distinction.⁸⁸

In conjunction with the coordination of global tax compliance, professional conduct and ethical standards are being developed, particularly in the United Kingdom, with its Professional Conduct in Relation to Taxation (PCRT).⁸⁹ The PCRT contains fundamental ethical principles produced jointly by seven professional bodies. It was formulated to provide guidance for members who are engaged in U.K. tax planning and tax compliance work. Tax consultation has become more complex, not only because of more complex tax laws, but because professionals must exercise sound judgment regarding the implications of their advice.⁹⁰

Jointly developed by the OECD and G-20 countries, the Common Reporting Standard (CRS) is a component of the Standard for Automatic Exchange of Financial Account Information in Tax Matters (AEOI standard). Although the CRS is modeled on FATCA, there are substantial differences. Specifically, with regard to trusts, FATCA procedures follow U.S. tax legislation and tax information exchange in circumstances where a tax obligation is due. In contrast, the existence of a tax obligation has no bearing on the amount of information that is required to be exchanged under the CRS procedures.⁹¹ Rather, the CRS’s focus is on whether an individual is a “controlling person of a trust” that satisfies the definition of “passive nonfinancial institution” for holding financial asset accounts.⁹² Tax authorities in EU countries, particularly France, the Netherlands, and Luxembourg, have recently questioned the tax treatment of trusts and their beneficiaries with regard to their tax residences.⁹³

As of Jan. 1, 2016, certain financial asset information then in existence became CRS-relevant for early-adopter countries.⁹⁴ The United States is not a CRS signatory; however, IRS Commissioner John Koskinen has called on Congress to amend the FATCA statutory provisions to allow the United States to participate in the CRS.⁹⁵ The CRS rules reflect a clear policy focus on “control,” apart from entity “ownership.”⁹⁶ FATCA seeks to identify U.S. taxpayers’ beneficial ownership in non-U.S. assets, with the conviction that tax liabilities are derived from income associated with that ownership.⁹⁷ The FATCA regime seeks the “specified U.S. person” with regard to non-U.S. FFIs and the “substantial U.S. owner” for passive NFFEs, which are “ownership-based” concepts.⁹⁸ In defining “equity interest” for a trust entity, a key determiner of the account holder, the CRS rules encompass the trustee (including a professional trustee), the settlor, beneficiaries, protectors, and any other person exercising ultimate control over the entity.⁹⁹

The CRS, like FATCA, adopts a residency test in determining which tax jurisdiction’s laws govern a specific entity’s FATCA/CRS due diligence and tax reporting requirements. For a trust, this test means the residency of the trustee(s).¹⁰⁰ Unlike FATCA, the CRS’s rules require that the entire value of underlying assets be disclosed in association with the trust’s fiduciary.¹⁰¹ Many practitioners are concerned that this global transparency movement may result in many difficult repercussions for their fiduciary clients, including cross-border litigation and risk of confidential information disclosures to government agencies.¹⁰²

In conjunction with the CRS, after January 2017, a “legal entity identifier” (LEI) is required of all investors in global financial markets, including trust entities.¹⁰³ The Financial Stability Board, set up by the G-20 countries and organized by the central bankers, is the body that issues the LEI. As part of the process of issuing an LEI, detailed information for each applicant is verified with public sources, through the Global Legal Entity Identifier Foundation (GLEIF) in Switzerland. The unique identification number will be required before the applicant can trade in security purchases and sales on financial markets, even by a third-party fund manager or broker. Because many trusts do not have information that is publicly available to allow this verification, obtaining an LEI may be difficult, if not impossible. Unless regulations or procedures are developed soon to accommodate trust entities, fiduciaries may effectively be “locked-out” of participation in the financial markets.¹⁰⁴

Another development in transparency occurred on Feb. 28, 2017, when members of the EU Parliament voted to adopt an amended anti-money-laundering directive¹⁰⁵ that will provide for public access to registers of beneficial owners of companies and trusts. Trusts were previously excluded from the directive on privacy grounds. The new requirements include full transparency, including revealing the identity of beneficial owners.¹⁰⁶

With these global developments confronting fiduciaries in mind, the future will necessitate experienced and knowledgeable practitioners to guide fiduciaries with their fiduciary duties and responsibilities. Today’s responsibilities are likely to lead to increased challenges for existing trust structures in the future, and informed communication with beneficiaries will become more important for fiduciaries. History has demonstrated that trusts are resilient, and their flexibility makes them an excellent structure to benefit families with complex governance and succession issues. However, these recent developments should motivate fiduciaries to analyze their asset-holding structure in light of these new disclosure and registration requirements.

Looking ahead

Part 3 of this article, in the December issue of The Tax Adviser, will illustrate the technical issues analyzed and explained in Parts 1 and 2. Part 3 will explain and analyze for foreign estates and foreign trusts the income distributions to U.S. and foreign beneficiaries in a comprehensive example. The example will encompass fiduciary accounting concepts and their determination of the entity’s DNI to illustrate how to maximize net income distributions to U.S. beneficiaries. The example will also illustrate the application of certain U.S. tax treaty provisions in determining the correct tax withholding amounts. It will also discuss tax information returns and fiduciary income tax return filing and reporting. Professional guidance by knowledgeable and experienced practitioners in both the United States and any foreign jurisdictions should enhance the fiduciary’s ability to successfully administer an estate or trust.  

Footnotes

¹See DeGroot, “Future-Proof Your Practice,” STEP Journal, p. 21 (October 2016).

²See Hauser, “Strong Constitution,” STEP Journal, p. 64 (October 2016).

³Id.

⁴Id.

⁵Kötz, “The Hague Convention on Law Applicable to Trusts and Their Recognition,” in Kaplan and Hauser, eds., Trusts in Prime Jurisdictions, p. 17 (Globe Law and Business Ltd. 4th ed. 2016).

⁶See hcch.net for detailed information on the Hague conventions.

⁷See Lortie, “Strength in Numbers,” STEP Journal, p. 78 (October 2016).

⁸Id.

⁹Id., p. 79.

¹⁰Kötz, “The Hague Convention on Law Applicable to Trusts and Their Recognition,” in Kaplan and Hauser, eds., Trusts in Prime Jurisdictions, p. 20 (Globe Law and Business Ltd. 4th ed. 2016).

¹¹Id.

¹²Id., p. 21.

¹³Id., p. 20.

¹⁴Id., p. 21.

¹⁵See Noseda, “The Hague Trust Convention—25 Years On,” in Kaplan, ed., Trusts in Prime Jurisdictions, p. 27 (Globe Law and Business Ltd. 3d ed. 2010).

¹⁶Id.

¹⁷Akers v. Samba, [2014] EWCA Civ. 1516, at [51] (English and Welsh Court of Appeals).

¹⁸See Watson, “Trusts Abroad,” 13-1 Trust Quarterly Review 42 (2015).

¹⁹See Eskin and Driscoll, “Estate Planning With Foreign Property,” 28-3 GP Solo 2 (April/May 2011).

²⁰Id., p. 4.

²¹See Roy, “Doesn’t Travel Well,” 14-2 STEP Trust Quarterly Review 7 (September 2016).

²²See the Uniform Law Commission’s website at uniformlaws.org (Oct. 24, 2015).

²³See Brown, Hayward, and Watson, “Achieving Situs,” Trusts & Estates, p. 25 (December 2015).

²⁴Id.

²⁵Id.

²⁶Black’s Law Dictionary (West Publishing Co. 6th ed. 1980).

²⁷Id.

²⁸Topsnik, 143 T.C. 240 (2014), and Topsnik, 146 T.C. 1 (2016).

²⁹See Greenwald, Giardelli, and Odell, “The Exceptional Importance of Getting an Individual’s Expatriation Right—Revisited,” 27-10 Journal of International Taxation 46 (October 2016).

³⁰Id., p. 48.

³¹See Roy, “Doesn’t Travel Well,” 14-2 STEP Trust Quarterly Review 5 ­(September 2016).

³²Id.

³³Id.

³⁴Id.

³⁵Id., p. 4.

³⁶See Paul, “Pearls From the Orient,” STEP Journal, p. 37 (February 2017).

³⁷Id.

³⁸Id., p. 38.

³⁹Secs. 7701(a)(30)(E) and (31)(B).

⁴⁰Sec. 2056(d)(1).

⁴¹Sec. 2056(d)(2).

⁴²Sec. 2056A(a)(3).

⁴³Sec. 2056A(i).

⁴⁴In Letter Ruling 199918039, the IRS ruled that if a trust is classified as a foreign trust under Sec. 7701(a)(30)(B), that classification would not cause the trust to fail to qualify as a QDOT under Sec. 2056A(a).

⁴⁵Sec. 2056A(b)(3)(A).

⁴⁶Regs. Secs. 1.1441-5(b)(2) and 20.2056A-11(d); Regs. Sec. 1.1441-5(b)(2)(iii); final regulations in T.D. 9808, effective Jan. 6, 2017.

⁴⁷Secs. 651(a) and 661(a).

⁴⁸Secs. 652(a) and 662(a).

⁴⁹Secs. 652(b) and 662(b).

⁵⁰Id.

⁵¹Regs. Sec. 1.265-1(c).

⁵²Sec. 643(a)(3).

⁵³Sec. 643(a)(6)(C).

⁵⁴Sec. 643(a)(6)(A).

⁵⁵Sec. 643(a)(6)(B).

⁵⁶Secs. 652(b) and 662(b); Regs. Secs. 1.652(b)-2(a) and 1.662(b)-1.

⁵⁷McNamara, “Reporting Trust and Estate Distributions to Foreign Beneficiaries: Part 1,” 43 The Tax Adviser 800, 808 (December 2012).

⁵⁸Foreign Account Tax Compliance Act, enacted as part of the Hiring Incentives to Restore Employment Act, P.L. 111-147.

⁵⁹The Chapter 3 tax rules and reporting responsibilities for the fiduciary are explained in the article, “Reporting Trust and Estate Distributions to Foreign Beneficiaries: Part 1,” 43 The Tax Adviser 800, 808 (December 2012).

⁶⁰Regs. Sec. 1.1473-1(a) defines “withholdable payments.”

⁶¹Regs. Sec. 1.1471-2(a)(1), as modified by Notice 2013-43. If a trust is a resident in a jurisdiction governed by a Model 1 IGA, tax withholding is required after Dec. 31, 2014.

⁶²Regs. Sec. 1.1471-5(b)(2)(iii).

⁶³Pasmanik and Stratos, “FATCA: A New World of Terminology and Compliance,” 46 The Tax Adviser 356 (May 2015).

⁶⁴Regs. Sec. 1.1471-5(e)(4)(i)(B).

⁶⁵Regs. Sec. 1.1471-5(e)(4)(i)(A).

⁶⁶Regs. Sec. 1.1474-5(a)(2).

⁶⁷Regs. Sec. 1.1472-1; Regs. Sec. 1.1474-5(a)(3).

⁶⁸Regs. Sec. 1.1473-1(b)(2)(v).

⁶⁹Regs. Secs. 1.1474-2(a)(1) and 1.1474-5.

⁷⁰Regs. Secs. 1.1472-1(c)(4) and 1.1472-1(c)(3).

⁷¹Regs. Sec. 1.1474-5(a).

⁷²A list of IGA jurisdictions can be found at www.treasury.gov.

⁷³Model 1 IGA, Article 4.

⁷⁴Id.

⁷⁵Model 2 IGA, Article 3.

⁷⁶See LeVine, Schumacher, and Zhou, “FATCA and the Common Reporting Standard,” 27-3 Journal of International Taxation 51 (March 2016).

⁷⁷Id.

⁷⁸Id.

⁷⁹Id.; Pasquantino, 544 U.S. 349 (2005).

⁸⁰Regs. Sec. 1.1441-5(e)(2); Regs. Sec. 1.1441-1(c)(6)(ii)(D).

⁸¹See Form W-8BEN-E instructions and T.D. 9610.

⁸²See Form W-8ECI instructions; Regs. Sec. 1.1471-3(b)(4).

⁸³T.D. 9808, effective for payments made after Jan. 5, 2017.

⁸⁴Regs. Sec. 1.1441-5(e)(4).

⁸⁵Regs. Sec. 1.1441-5(e)(3)(i)(A); Regs. Sec. 1.1441-5(e)(3(i)(B).

⁸⁶Regs. Sec. 1.1441-1(c)(6)(i).

⁸⁷See Notice 97-34, Section IV.B. A form to evidence the U.S. agent’s appointment is contained therein, which is valid if properly executed by the parties.

⁸⁸Hodson, “Taxing Times Ahead,” 24-8 STEP Journal 27 (October 2016).

⁸⁹Young, “Beyond the Letter of the Law,” 24-10 STEP Journal 23 (December 2016/January 2017).

⁹⁰Id.

⁹¹Noseda, “Trusts Under Attack: Privacy, Transparency and Conflict With the Taxman,” in Kaplan and Hauser, eds., Trusts in Prime Jurisdictions, p. 707 (Globe Law and Business Ltd. 4th ed. 2016).

⁹²Id.

⁹³Id., p. 711.

⁹⁴LeVine, Schumacher, and Zhou, “FATCA and the Common Reporting Standard,” 27-3 Journal of International Taxation 43 (March 2016).

⁹⁵See “Industry News,” STEP Journal, p. 19 (May 2016).

⁹⁶LeVine, Schumacher, and Zhou, “FATCA and the Common Reporting Standard,” 27-3 Journal of International Taxation 48 (March 2016).

⁹⁷Id.

⁹⁸Id. A “specified U.S. person” is essentially a U.S. taxpayer who has an equity or debt interest in certain non-U.S. assets. A “substantial U.S. person owner” of a passive NFFE has a 10% or more ownership.

⁹⁹Id.

¹⁰⁰Id.

¹⁰¹Id., p. 49.

¹⁰²Id.

¹⁰³Directive (EU) 2004/109/EC and Commission Delegated Regulation (EU) 2016/1437 (May 19, 2016).

¹⁰⁴See “Industry News,” STEP Journal, p. 20 (December 2015).

¹⁰⁵Directive (EU) 2015/849.

¹⁰⁶See “Proposal for a Directive of the European Parliament and of the Council Amending Directive (EU) 2015/849” (COM(2016)0450).

	Contributor
	Lawrence H. McNamara is a sole practitioner in North Bethesda, Md. He has been a member of the AICPA Trust, Estate and Gift Tax Technical Resource Panel, its Foreign Trust Task Force, and its Trust Accounting Income Task Force—Technical Issues Working Group. For more information about this article, contact thetaxadviser@aicpa.org.