Foreign Account Reporting Information
MEMORANDUM
To: Pete Moison, Castle Re Insurance
From: Michael A. Heimos, Michael A. Heimos PC
Date: 13th May 2011
Re: 953(d) election, FATCA and FBAR
You asked me to prepare a memorandum providing a general survey of the tax ramifications of [NAME] making a 953(d) election under the Internal Revenue Code of 1986 (Code) and continuing operations in Bermuda, having been organized in and gaining authorization to carry on a life insurance business therein. More specifically, you asked for an explanation of the application of the HIRE/FATCA rules (enacted in March 2010) to Castle Re as to both payments of US source income to it and as to policies it issues to US persons; and, of the Bank Secrecy Act or “FBAR” rules to both Castle Re for its non-US accounts and financial interests, and as to policies it issues to US persons.
The scope of this memorandum is as stated above, it is intended to be a general survey and not a comprehensive discussion as this is a vast area that can fill a treatise itself. Here we will provide a broad sweep through the concepts that arise because of the election referred to above.
953(d) Elections
As stated in a separate memorandum, the making of the “(d) election” means that, as a “domestic corporation” for all purposes of the Code, the electing company is also a “United States person” under the Code (as provided in section 7701). Since Congress drafted section 953(d) as it did, an electing company is treated as being “…created or organized in the United States or under the law of the United States or of any State…” under subsection 7701(4) and not “foreign” under subsection 7701(5).
It should also be pointed out that the “(d) election” only affects tax treatment under the Code…it does not necessarily have any affect for non-Code purposes. This would include the Bank Secrecy Act provisions regarding the reporting of foreign financial accounts commonly known as the “FBAR rules,” as I discuss below.
An election under section 953(d)(1) applies to the taxable year for which it is made and all subsequent taxable years, unless revoked with the consent of the Secretary. Also, if a corporation which made an election for any taxable year fails to meet the requirements of the section for any subsequent taxable year, the election does not apply to any taxable year beginning after such subsequent taxable year.
FATCA
FATCA was enacted in March 2010 as part of the HIRE Act, and adds to the Code “Chapter 4, Taxes to Enforce Reporting on Certain Foreign Accounts. Chapter 4 is the new series of sections 1471-1474 and it adds considerable complexity to the already complicated withholding and reporting rules applicable to foreign persons under the Code. FATCA also added new sections 6038D, 1298(f), 643(i) to the Code that impact US citizens and non-citizen US residents having virtually any one of a host of different foreign assets.
FATCA is aimed at increasing the disclosure of US beneficial owners of payments of US source income that is paid to foreign entities such as banks and trust companies, and is far-reaching in its potential impact on both US payors and foreign entity recipients. In addition to requiring foreign entities to report US beneficial owners of foreign accounts/financial interests, as noted above other new reporting provisions were added that require individual US persons to report on foreign accounts/financial interests. In other words, one would be one accessory short in saying that Congress adopted a “belt and suspenders” approach, as FATCA requires reporting by US payors, the “middlemen” foreign entities, and US beneficial owners.
FATCA is quite vast in its detail if not sheer length. Happily, since Castle Re is a US person for Code purposes it escapes applicability.
Applied to Castle Re
Castle Re is a domestic corporation for the purposes of the Code, which includes FATCA. As I stated above, the language of section 953(d) read together with that of section 7701 also results in another moniker, that of a “United States person.” Fortunately, I can spare you a complete exposition of FATCA applying to Castle Re because the whole scheme as applicable to the “middlemen” to which I referred above trains sights on a “foreign financial institution” that does or does not do certain things as stated in the legislation. As a “foreign financial institution” must be a “foreign entity,”[1]and that term is defined as “…any entity which is not a United States person,”[2]none of the onerous rules in sections 1471-1474 apply to Castle Re.
Applied to Policyholder
The foregoing conclusion also benefits Castle Re policyholders.
FATCA created additional reporting requirements for individuals that beneficially own foreign financial assets, effective for taxable years beginning after March 18, 2010. New section 6038D requires individual taxpayers with an interest in a “specified foreign financial asset” during the taxable year to attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than US$50,000. The nature of the information is similar, but not identical, to that required on the FBAR rules’ Form TD F 90-22.1.
The term “specified foreign financial assets” refers to depository or custodial accounts at “foreign financial institutions” and, to the extent not held in an account at a financial institution: (1) stocks or securities issued by foreign persons; (2) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a United States person; and (3) any interest in a foreign entity (as defined in section 1473). A policy issued by Castle Re is not included in items (1) or (3) above and although it most probably is an “…other financial instrument or contract held for investment,” it is issued by a United States person as Castle Re has taken the “(d) election.”
Therefore, no individual policyholder that purchases a Castle Re policy will have FATCA reporting thereof under section 6038D. And if such a policy is purchased by an entity such as a trust, FATCA does not apply as it only applies to individuals.[3]
FBAR
An important, supposedly non-tax, provision of federal law requires a “citizen or resident of the United States,” and “a person in, and doing business in, the United States” to file a report with the US Treasury Department if the individual or entity has a “financial interest” in one or more foreign bank accounts, securities accounts, or other financial accounts that exceed US$10,000 in value at any time in the year. The report is required to be filed with the Treasury Department (not the IRS) by June 30 of the following calendar year, on Form TD F 90-22.1.
The US Treasury and IRS initiated routine enforcement of the FBAR reporting requirements following the publication of a revised Form TD F 90-22.1 in October 2008. It has published several rulings and several notices describing which kinds of foreign financial accounts (such as mutual funds, hedge funds, retirement accounts, and pooled offshore investment funds) and which kinds of US entities it believes to be covered by the FBAR rules. They also have tinkered with the instructions to the Form, etc.
Final regulations under the FBAR rules were issued on February 24, 2011 and the below discussion relies solely thereon as they are the “latest word” on the subject.
Applied to Castle Re
The FBAR filing obligation applies to “each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country…” A “United States person” for this purpose includes “an entity, including but not limited to, a corporation, partnership, trust, or limited liability company created, organized, or formed under the laws of the United States, any State, the District of Columbia, the Territories and Insular Possessions of the United States, or the Indian Tribes. Although Castle Re is a corporation organized/formed under the laws of Bermuda, a territory of a foreign country, the FBAR regulations probably apply to it because it is “(d) elected” and thus for Code purposes is a “United States person” (although, it is debatable because the FBAR regulation emanates from different legislation than the Code and the foregoing definition refers only to entities “created, organized, or formed” in the US etc.; Castle Re is a US taxpayer, but nevertheless it is not “created, organized, or formed” in the US etc.).
If Castle Re has any reportable accounts “in” a foreign country or countries, it must file an annual FBAR. The reportable “accounts” include myriad things that are not actually accounts in a common sense rendering of the term. The term ‘‘bank account’’ means a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking. The term ‘‘securities account’’ means an account with a person engaged in the business of buying, selling, holding or trading stock or other securities. The term ‘‘other financial account’’ means an account with a person that is in the business of accepting deposits as a financial agency; “an account that is an insurance or annuity policy with a cash value;” an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or “an account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions.
One rule that might soften the impact of FBAR on Castle Re is the allowance for a United States person having a financial interest in or signatory authority over 25 or more foreign financial accounts. Such a person need only provide the number of financial accounts and certain other basic information on the report (but will be required to provide detailed information concerning each account when so requested by the IRS).
Those individual US persons (citizens or residents), if any, who work for Castle Re might have to do FBARs vis-à-vis the company’s accounts as well. It would be advisable anyhow, in the cases of US persons who have signature or other authority over the disposition of the company’s money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.
Applied to Policyholder
Stated summarily, the FBAR filing obligation applies to each United States person having a financial interest in, or signature or other authority over an insurance or annuity policy with a cash value that is “in” a foreign country. As to when a life insurance or annuity contract is “in” a foreign country is anyone’s guess (the only prior guidance as to this point is informal and I must say, unsatisfactory; see attached). But as one is guessing, I can point out that most practitioners focus on the jurisdiction of the insurer and the situs of issuance of the policy (usually one and the same) for the place it is “in.” For example, here that locus would be Bermuda.
A “foreign country” is defined under the FBAR regulations as including “…all geographical areas located outside of the United States as defined in 31 CFR 1010(hhh).”[4]That subsection defines the “United States” as the States of the United States, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States. Again, Bermuda is not one of the foregoing parts of the United States, so therefor it is a “foreign country” for the purposes of the FBAR rules.
Thus the freedom from FATCA reporting does not benefit Castle Re policyholders when it comes to the FBAR. Any individual or entity policyholder that purchases a Castle Re policy in Bermuda will have FBAR reporting thereof under the current regulations.
[4]The Treasury did not reference the section correctly. It should be: “31 CFR 1010.100(hhh).”
Foreign Account Reporting Information
2011 06 01
MEMORANDUM
To: Pete Moison, Castle Re Insurance
From: Michael A. Heimos, Michael A. Heimos PC
Date: 13th May 2011
Re: 953(d) election, FATCA and FBAR
You asked me to prepare a memorandum providing a general survey of the tax ramifications of [NAME] making a 953(d) election under the Internal Revenue Code of 1986 (Code) and continuing operations in Bermuda, having been organized in and gaining authorization to carry on a life insurance business therein. More specifically, you asked for an explanation of the application of the HIRE/FATCA rules (enacted in March 2010) to Castle Re as to both payments of US source income to it and as to policies it issues to US persons; and, of the Bank Secrecy Act or “FBAR” rules to both Castle Re for its non-US accounts and financial interests, and as to policies it issues to US persons.
The scope of this memorandum is as stated above, it is intended to be a general survey and not a comprehensive discussion as this is a vast area that can fill a treatise itself. Here we will provide a broad sweep through the concepts that arise because of the election referred to above.
953(d) Elections
As stated in a separate memorandum, the making of the “(d) election” means that, as a “domestic corporation” for all purposes of the Code, the electing company is also a “United States person” under the Code (as provided in section 7701). Since Congress drafted section 953(d) as it did, an electing company is treated as being “…created or organized in the United States or under the law of the United States or of any State…” under subsection 7701(4) and not “foreign” under subsection 7701(5).
It should also be pointed out that the “(d) election” only affects tax treatment under the Code…it does not necessarily have any affect for non-Code purposes. This would include the Bank Secrecy Act provisions regarding the reporting of foreign financial accounts commonly known as the “FBAR rules,” as I discuss below.
An election under section 953(d)(1) applies to the taxable year for which it is made and all subsequent taxable years, unless revoked with the consent of the Secretary. Also, if a corporation which made an election for any taxable year fails to meet the requirements of the section for any subsequent taxable year, the election does not apply to any taxable year beginning after such subsequent taxable year.
FATCA
FATCA was enacted in March 2010 as part of the HIRE Act, and adds to the Code “Chapter 4, Taxes to Enforce Reporting on Certain Foreign Accounts. Chapter 4 is the new series of sections 1471-1474 and it adds considerable complexity to the already complicated withholding and reporting rules applicable to foreign persons under the Code. FATCA also added new sections 6038D, 1298(f), 643(i) to the Code that impact US citizens and non-citizen US residents having virtually any one of a host of different foreign assets.
FATCA is aimed at increasing the disclosure of US beneficial owners of payments of US source income that is paid to foreign entities such as banks and trust companies, and is far-reaching in its potential impact on both US payors and foreign entity recipients. In addition to requiring foreign entities to report US beneficial owners of foreign accounts/financial interests, as noted above other new reporting provisions were added that require individual US persons to report on foreign accounts/financial interests. In other words, one would be one accessory short in saying that Congress adopted a “belt and suspenders” approach, as FATCA requires reporting by US payors, the “middlemen” foreign entities, and US beneficial owners.
FATCA is quite vast in its detail if not sheer length. Happily, since Castle Re is a US person for Code purposes it escapes applicability.
Applied to Castle Re
Castle Re is a domestic corporation for the purposes of the Code, which includes FATCA. As I stated above, the language of section 953(d) read together with that of section 7701 also results in another moniker, that of a “United States person.” Fortunately, I can spare you a complete exposition of FATCA applying to Castle Re because the whole scheme as applicable to the “middlemen” to which I referred above trains sights on a “foreign financial institution” that does or does not do certain things as stated in the legislation. As a “foreign financial institution” must be a “foreign entity,”[1]and that term is defined as “…any entity which is not a United States person,”[2]none of the onerous rules in sections 1471-1474 apply to Castle Re.
Applied to Policyholder
The foregoing conclusion also benefits Castle Re policyholders.
FATCA created additional reporting requirements for individuals that beneficially own foreign financial assets, effective for taxable years beginning after March 18, 2010. New section 6038D requires individual taxpayers with an interest in a “specified foreign financial asset” during the taxable year to attach a disclosure statement to their income tax return for any year in which the aggregate value of all such assets is greater than US$50,000. The nature of the information is similar, but not identical, to that required on the FBAR rules’ Form TD F 90-22.1.
The term “specified foreign financial assets” refers to depository or custodial accounts at “foreign financial institutions” and, to the extent not held in an account at a financial institution: (1) stocks or securities issued by foreign persons; (2) any other financial instrument or contract held for investment that is issued by or has a counterparty that is not a United States person; and (3) any interest in a foreign entity (as defined in section 1473). A policy issued by Castle Re is not included in items (1) or (3) above and although it most probably is an “…other financial instrument or contract held for investment,” it is issued by a United States person as Castle Re has taken the “(d) election.”
Therefore, no individual policyholder that purchases a Castle Re policy will have FATCA reporting thereof under section 6038D. And if such a policy is purchased by an entity such as a trust, FATCA does not apply as it only applies to individuals.[3]
FBAR
An important, supposedly non-tax, provision of federal law requires a “citizen or resident of the United States,” and “a person in, and doing business in, the United States” to file a report with the US Treasury Department if the individual or entity has a “financial interest” in one or more foreign bank accounts, securities accounts, or other financial accounts that exceed US$10,000 in value at any time in the year. The report is required to be filed with the Treasury Department (not the IRS) by June 30 of the following calendar year, on Form TD F 90-22.1.
The US Treasury and IRS initiated routine enforcement of the FBAR reporting requirements following the publication of a revised Form TD F 90-22.1 in October 2008. It has published several rulings and several notices describing which kinds of foreign financial accounts (such as mutual funds, hedge funds, retirement accounts, and pooled offshore investment funds) and which kinds of US entities it believes to be covered by the FBAR rules. They also have tinkered with the instructions to the Form, etc.
Final regulations under the FBAR rules were issued on February 24, 2011 and the below discussion relies solely thereon as they are the “latest word” on the subject.
Applied to Castle Re
The FBAR filing obligation applies to “each United States person having a financial interest in, or signature or other authority over, a bank, securities, or other financial account in a foreign country…” A “United States person” for this purpose includes “an entity, including but not limited to, a corporation, partnership, trust, or limited liability company created, organized, or formed under the laws of the United States, any State, the District of Columbia, the Territories and Insular Possessions of the United States, or the Indian Tribes. Although Castle Re is a corporation organized/formed under the laws of Bermuda, a territory of a foreign country, the FBAR regulations probably apply to it because it is “(d) elected” and thus for Code purposes is a “United States person” (although, it is debatable because the FBAR regulation emanates from different legislation than the Code and the foregoing definition refers only to entities “created, organized, or formed” in the US etc.; Castle Re is a US taxpayer, but nevertheless it is not “created, organized, or formed” in the US etc.).
If Castle Re has any reportable accounts “in” a foreign country or countries, it must file an annual FBAR. The reportable “accounts” include myriad things that are not actually accounts in a common sense rendering of the term. The term ‘‘bank account’’ means a savings deposit, demand deposit, checking, or any other account maintained with a person engaged in the business of banking. The term ‘‘securities account’’ means an account with a person engaged in the business of buying, selling, holding or trading stock or other securities. The term ‘‘other financial account’’ means an account with a person that is in the business of accepting deposits as a financial agency; “an account that is an insurance or annuity policy with a cash value;” an account with a person that acts as a broker or dealer for futures or options transactions in any commodity on or subject to the rules of a commodity exchange or association; or “an account with a mutual fund or similar pooled fund which issues shares available to the general public that have a regular net asset value determination and regular redemptions.
One rule that might soften the impact of FBAR on Castle Re is the allowance for a United States person having a financial interest in or signatory authority over 25 or more foreign financial accounts. Such a person need only provide the number of financial accounts and certain other basic information on the report (but will be required to provide detailed information concerning each account when so requested by the IRS).
Those individual US persons (citizens or residents), if any, who work for Castle Re might have to do FBARs vis-à-vis the company’s accounts as well. It would be advisable anyhow, in the cases of US persons who have signature or other authority over the disposition of the company’s money, funds or other assets held in a financial account by direct communication (whether in writing or otherwise) to the person with whom the financial account is maintained.
Applied to Policyholder
Stated summarily, the FBAR filing obligation applies to each United States person having a financial interest in, or signature or other authority over an insurance or annuity policy with a cash value that is “in” a foreign country. As to when a life insurance or annuity contract is “in” a foreign country is anyone’s guess (the only prior guidance as to this point is informal and I must say, unsatisfactory; see attached). But as one is guessing, I can point out that most practitioners focus on the jurisdiction of the insurer and the situs of issuance of the policy (usually one and the same) for the place it is “in.” For example, here that locus would be Bermuda.
A “foreign country” is defined under the FBAR regulations as including “…all geographical areas located outside of the United States as defined in 31 CFR 1010(hhh).”[4]That subsection defines the “United States” as the States of the United States, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States. Again, Bermuda is not one of the foregoing parts of the United States, so therefor it is a “foreign country” for the purposes of the FBAR rules.
Thus the freedom from FATCA reporting does not benefit Castle Re policyholders when it comes to the FBAR. Any individual or entity policyholder that purchases a Castle Re policy in Bermuda will have FBAR reporting thereof under the current regulations.
[4]The Treasury did not reference the section correctly. It should be: “31 CFR 1010.100(hhh).”
