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American Citizens Abroad Town Hall Seminar

American Citizens Abroad Town Hall Seminar. Daniel Hyde daniel.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?

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American Citizens Abroad Town Hall Seminar

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  1. American Citizens AbroadTown Hall Seminar Daniel Hyde daniel.hyde@westletondrake.ch 23 September 2013

  2. 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?

  3. 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! Myth You 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

  4. 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

  5. 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

  6. 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 fornot filing – higher of $10,000, or 35% of receipt

  7. 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

  8. 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.

  9. 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

  10. 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

  11. 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

  12. 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.

  13. 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.

  14. 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.

  15. 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);

  16. 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

  17. Questions and discussions Westleton Drake 6, rue de la Croix d’Or CH-1204, Geneva Tel: +41 (0)22 310 6450 info@westletondrake.ch www.westletondrake.ch

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