American Citizens AbroadTown Hall Seminar

Daniel Hydedaniel.hyde@westletondrake.ch

23 September 2013

Agenda

• US tax compliance issues• As an entrepreneur, what do I need to know when

setting up a company overseas for US tax reporting?

• What is my US tax liability if I sold my Swiss house?

Form 1040Individual Income Tax Return

• You must file if your worldwide gross income exceeds:– Single $9,750– Married filing Jointly $19,500– Married filing Separately $3,800

• Thresholds increase if aged over 65.

• Don’t forget your children!

MythYou are not exempt from filing because your income is excluded by the foreign earned income exclusion. You need file a tax return to make a claim to the exclusion

Form 8938Statement of Specified Foreign Financial Assets

• Report of certain foreign financial assets as part of tax return filing.– Essentially all financial assets (not real estate) other than

those reported on other information returns (see later slides!)– Requires a basic reconciliation of the income earned on those

assets back to the tax return as well as highest values.– In addition to, not in lieu of, the FBAR.

• For taxpayers living abroad required if value of assets exceed:– $200k on last day of tax year– $300k at any time– Thresholds double for married taxpayers filing jointly

• Penalty for not filing - $10,000

Form TD F 90-22.1“The FBAR”

• Report of all foreign bank and financial accounts including maximum balances in the year.

• Required where aggregate maximum balance exceeds $10,000

• No extensions allowed – due June 30.• Since 1 July 2013, mandatory requirement to e-

file.• Penalty for non-wilful non-filing $10,000.Myth

Accounts with less than $10,000 are still required to be reported if filing threshold otherwise met

Form 3520 (1)Annual Return to Report Certain Foreign Gifts

• Disclosure required for receipt of:– More than $100,000 gift from a non-US person or foreign

estate– More than $14,723 from foreign corporations or

partnerships treated as gifts

• Generally, foreign gifts and bequests are not taxable (beware transfers from companies)

• Filed separately to income tax return, but due date is the same (including extensions).

• Penalty for not filing – higher of $10,000, or 35% of receipt

Form 3520 (2)Annual Return of Transactions with Foreign Trusts

• Disclosure required if you are the owner/grantor/settlor of a non-US trust

• Disclosure required if you made a transfer to, or received a distribution from a non-US trust

• Penalty for not filing – higher of $10,000 or 35% of transfer/distribution value or 5% of trust assets “owned” by the filer

Form 3520AAnnual Return Foreign Trusts with US owner

• Return of a “Foreign Grantor Trust” where the settlor/grantor is the tax owner of the assets

• Due March 15 – extension available but separately filed to income tax return extension

• Penalty for not filing – greater of $10,000 or 5% of trust assets “owned” by the filer.

Form 5471Return with Respect to Foreign Corporations

• Required annually for Controlled Foreign Corporations– More than 50% of vote or value held by US

shareholders who each own at least 10%

• Required in any year that an interest exceeds 10%, increases by 10% or decreases below 10%

• May be “phantom income” inclusion– Undistributed personal income including investment

income and personal service contracts

• Penalty for not filing - $10,000

Form 8865Return with Respect to Foreign Partnerships

• Required annually for Controlled Foreign Partnerships– More than 50% held by at least 10% US partners

• Required in any year that an interest exceeds 10%, increases by 10% or decreases below 10%

• Thresholds measure share of capital, profits, income or deductions.

• K-1 is produced for flow through to personal tax return

• Penalty for not filing - $10,000

Passive Foreign Investment Companies (PFICs)

• A foreign company where:– At least 75% of income is passive income.– At least 50% of assets are passive income producing

asset.– Cash is a passive income producing assets.

• Dividends and any exit proceeds would be ordinary income.

• Some dividends and all exit proceeds allocated across holding period with deemed interest charge on amounts allocated to prior tax years.

• “Once a PFIC, always a PFIC”.• Report of Form 8621 within income tax return

Check the box election (1)

• A foreign company can elect to be treated as a partnership (2+ owners) or disregarded entity (single owner) for US tax purposes (similar to US LLC).

• CFC/Subpart F rules, and PFIC rules are avoided as not a corporation of US tax purposes.

• Flow through of all items of income, deduction and credit.

• Corporate taxes paid flow through and are creditable taxes.

• Income may qualify for foreign earned income exclusion.

Check the box election (2)

• Election must be made within 75 days of effective date (three year concession in some circumstances)

• Election on an existing company creates a deemed taxable liquidation for US tax purposes.

Doing business in the US?

• US tax on profits of a foreign corporation with “Income Effectively Connected” to a “US Trade or Business”

• Neither term is defined in the Internal Revenue Code!

• Treaties generally limit taxation to income derived from a “permanent establishment in the US”– Defined term:

• A place of management• A branch• An office• A factory, etc.

• Caution: Individual states are not parties to tax treaties.

US tax on sale of Swiss residence

• Calculate gain:– Sales price less sales cost using CHF/USD exchange

rate on date of sale– Less: original purchase price less purchase expenses

using CHF/USD exchange rate on date of purchase– Less: any improvements made to the property using

CHF/USD exchange rate on date of each improvement

• Qualify for Exclusion of gain from sale of Principal Residence?• Owned and used as principal residence for at least 2

out of the last 5 years ending on the date of sale;• $250,000 exclusion per person ($500,000 married filing

joint);

US tax on sale of Swiss residence

• Rate differs between Cantons and usually based on ownership period

• Possibility to defer Swiss tax – roll gain into new purchase?

• Swiss tax can be used as a Foreign Tax Credit on U.S. return– But only if at least 10%?

• CHF/USD exchange rate on date paid or accrued

Questions and discussions

Westleton Drake6, rue de la Croix d’Or

CH-1204, Geneva

Tel: +41 (0)22 310 6450info@westletondrake.ch

www.westletondrake.ch