Ownership in a Foreign Trust or Offshore Partnership
International Tax and Trust Attorneys
The IRS has established that there are valid and legitimate reasons why “US Persons” would establish or own an interest in a foreign trust or offshore partnership. There are tax implications for US taxpayers who form or own an interest in an offshore trust. IRS FBAR and tax reporting requirements apply to those who create an offshore trust, transfer money, assets or real property to an offshore trust, receive a beneficial distribution or are treated as the effective owner of a foreign trust. US tax reporting and payment requirements apply to US taxpayers who either own or are beneficiaries of a foreign trust, as well as to the trust entity itself.
Form 3520 – Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, and Instructions.
The IRS Form 3520 is required whenever a US taxpayer transfers money, assets or property into a foreign trust. It must also be filed whenever a US taxpayer receives distributions from a foreign trust (directly or indirectly) or is the recipient of specific bequests or gifts from offshore trusts or corporations.
What are the Income Tax Consequences for a US Taxpayer with an Interest in a Foreign Trust?
Generally speaking, if you own a foreign trust or have an interest in an offshore trust or partnership, you will be taxed on the income of that trust. You may be treated as the owner of a foreign trust if you transfer assets or money into an offshore trust which has a US taxpayer as a beneficiary for any portion of that trust. If you are a US taxpayer who is a beneficiary of a foreign trust, you will most likely receive an IRS Form 3520-A “Foreign Grantor Trust Beneficiary Statement” or a “Foreign Non Grantor Trust Beneficiary Statement” and are responsible for reporting that income and paying applicable taxes.
IRS Disclosures Required of US Citizens, Residents and Non Residents
US taxpayers (citizens and residents of the US) are taxed by the IRS on their worldwide income. Congress has recently enacted FATCA and other sweeping legislation designed to prevent the use of foreign partnerships, a foreign trust or other offshore entities to defer or avoid paying US taxes.
IRS filing and reporting requirements also apply to US taxpayers who are “beneficial owners” of a foreign trust. In other words, the IRS is interested in who actually “receives or has the right to receive” the beneficial interest, proceeds, profits, or other advantages provided by the trust. It is no longer safe or a sound strategy to attempt to disguise the “beneficial owner” of a foreign partnership or an offshore trust through the use of entities or other individuals.
US taxpayers who own or are beneficiaries of an offshore trust or partnership face stringent reporting requirements. The IRS issues substantial penalties for the failure to submit forms associated with a foreign trust (IRS Form 3520 and 3520-A).
Who are “US Persons” Identified in Many IRS Foreign Trust Related Forms?
Having ownership interests in offshore partnerships, corporations, or a foreign trust requires complex reporting for “US Persons,” who must disclose foreign holdings, bank and investment accounts in order to avoid draconian penalties and potential criminal tax exposure for non-compliance with the IRS and FBAR reporting requirements. Foreign tax credits and foreign income exclusions can substantially reduce or eliminate tax liabilities on offshore income.
“US Persons” is an IRS term that includes a US resident or citizen, domestic partnership, estate, trust or corporation. A foreign national is usually classified as a resident under this definition if the person has a lawful permanent residence (green card) or meets the requirements of the “substantial presence” test. Non-residents are taxed at a different rate based upon income that is generated by US employment, trade or business, or at a 30% rate for US source income that is not associated with a US business or trade activities.
Contact Experienced Tax Attorneys for Questions Relating to Ownership or Beneficial Interest in a Foreign Trust
If you own or have a controlling interest in or are the beneficiary of a foreign trust you face complex disclosure and reporting requirements, as well as sophisticated tax exposure and calculation issues. The experienced foreign trust and foreign partnership attorneys at Allen Barron are uniquely positioned to advise you on your holdings, income and associated reporting and taxation responsibilities. We invite you to contact us or call for a free consultation at 866-631-3470.
The failure to fully disclose offshore accounts, investments and assets such as foreign partnerships or an offshore trust exposes US taxpayers to substantial penalties and potential criminal tax prosecution. Protect yourself. Learn about the protections of the “attorney-client privilege.” Consider the single source advantage of our coordinated tax, legal and accounting services.
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