A rather obscure law change last year now imposes a non-tax filing obligation on U.S. persons with interests outside of the U.S. This is particularly relevant for U.S. trusts with offshore entities, even if the trust is not a U.S. trust for tax purposes. As this is not a tax form, a “check-the-box” to disregard does not change this obligation. For individuals in the U.S. Voluntary Disclosure program, an election to “sham out” an entity does not cause the form to be inapplicable. The bottom line is that a vehicle formed under U.S. law, be it a trust, corporation, partnership or LLC, is subject to these rules, irrespective of its U.S. tax classification. U.S. persons owning such structures are subject to reporting requirements, even if the vehicle is transparent for U.S. tax purposes.
May 29, 2015 is the deadline to submit the 2014 Benchmark Survey of U.S. Direct Investment Abroad, or Form BE-10, to the Bureau of Economic Analysis (“BEA”).
Form BE-10 Filing Requirement
Form BE-10 is one of several surveys used by the BEA to collect information about inbound and outbound foreign investment under the International Investment and Trade in Services Survey Act (the “Act”). The BE-10 survey is conducted every five years.
The 2014 Form BE-10 must be filed by any U.S. person that had (direct or indirect) ownership or control of at least 10% of the voting stock of a foreign business enterprise (a “Foreign Affiliate”) at any time in the 2014 fiscal year. Such U.S. persons or “U.S. Reporters” are required to file Form BE-10, whether or not they were previously contacted by the BEA. Previously, filing was only due if there was an invitation to file; now all must file.
Reportable “business enterprises” include organizations, associations, branches, or ventures which exist for profit-making purposes or to otherwise secure economic advantage, as well as any ownership of any real estate.
The filing requirement applies regardless of the value of the investment in the Foreign Affiliate. Moreover, a U.S. person may be required to file Form BE-10 even if the foreign business enterprise was liquidated, sold, or otherwise disposed of in 2014, so long as the U.S. person held a reportable interest for at least part of 2014.
Deadline & Extension to File Form BE-10
The due date for the 2014 Form BE-10 is May 29, 2015 for U.S. Reporters with fewer than 50 forms, andJune 30, 2015 for U.S. Reporters required to file 50 or more forms.
U.S. Reporters may obtain an extension to file Form BE-10 by filing a request by the original filing deadline. The BEA may grant extensions at its discretion and the extension’s length depends on the number of interests that the U.S. Reporter needs to report.
A U.S. Reporter may file for an extension via the BEA’s eFile system, fax, or telephone. However, it is important for the U.S. Reporter to obtain a Reporter ID from the BEA via telephone at least 1-2 days before the deadline to file for an extension.
Penalties for Failure to File Form BE-10
Penalties for failure to file Form BE-10 include civil penalties ranging from $2,500 to $25,000 and injunctive relief to compel the completion and filing of the Form.
Individuals who wilfully fail to report, as well as officers, directors, and employees who participate in a willful violation, may be subject to imprisonment for up to one year and fined up to $10,000.
The Act provides that the information collected by the BE-10 survey is confidential and may only be used by those authorized to perform functions under the Act for analytical or statistical purposes (or to determine the applicable penalty for failure to file).
The Act further specifies that the information contained in Form BE-10 will not be published or otherwise made available in a manner that allows the identification of the filer.
For purposes of Form BE-10, the term “persons” is defined broadly and includes (but is not limited to) individuals, partnerships, associations, estates, trusts, corporations, and other organizations. The term “U.S. persons” for this purpose means any persons resident or subject to the jurisdiction of the United States.
However, U.S. citizens who reside, or expect to reside, outside the U.S. for less than a year are still considered U.S. persons. Conversely, non-U.S. citizens are considered U.S. persons, and thus potentially subject to the BE-10 filing requirements, if they reside, or expect to reside, in the U.S. for one year or more (unless they are in the U.S. on temporary work assignment or as government/consular employees).
Estates & Trusts
Executors of U.S. estates, as well as trustees, beneficiaries and settlors of both U.S. and foreign trusts may have a BE-10 reporting obligation insofar as the estate or trust in question owns reportable interests in non-U.S. business enterprises.
For purposes of Form BE-10, a U.S. estate is considered a U.S. person. Therefore, the obligation to report the estate’s interests in Foreign Affiliates, if any, would fall upon the estate’s administrator or executor (and not the beneficiaries).
In contrast, both U.S. and foreign trusts are treated as “intermediaries” for purposes of Form BE-10 reporting. As such, they are not considered the owners of foreign interests held in the trust. Instead, thebeneficiary(ies) of the trust is (are) generally considered the owners. There are two exceptions to this rule: (i) if the settlor preserved a (vested or contingent) reversionary interest in the trust’s assets; or (ii) if the trust was created by an organization (e.g., a corporation) and the latter’s members (e.g., shareholders) are the trust’s beneficiaries. In either of these two cases, the settlor would be treated as the owner instead of the beneficiaries.
As intermediaries, the trusts’ (i.e., the trustees’) reporting role depends on their U.S. or non-U.S. status.
- U.S. trusts have an obligation to either (i) report the necessary information on Form BE-10 on behalf of the U.S. Reporter (usually, the beneficiary) or (ii) instruct the U.S. Reporter to submit the required information and provide to the U.S. Reporter any other information that the U.S. Reporter needs to file the required Form. In the latter case, the trust must also inform the BEA as to when and how it instructed the U.S. Reporter in relation to its BE-10 filing obligations.
- In contrast, non-U.S. trusts are disregarded and the U.S. Reporter in question (e.g., either the beneficiary or the settlor) is treated as directly owning any Foreign Affiliate owned by the trust.
Interests in Foreign Partnerships
Reportable interests may include interests in foreign partnerships. In the context of general partnerships, unless the governing instrument contains clauses to the contrary, the general partners are attributed equal ownership of the partnership.
In the case of limited partnerships, the rules look to the person who controls the partnership, and not to each partner’s share of partnership equity. Thus, unless the partnership agreement states otherwise, the general partner in a limited partnership would be attributed 100% ownership of the limited partnership, while the limited partner(s) are presumed to have zero voting interest in the limited partnership.
Investments in Non-U.S. Real Estate
The mere ownership of real estate is deemed to be a business enterprise and, as such, it is reportable on Form BE-10 if owned by a U.S. person.
However, there are two exceptions to Form BE-10 reporting that are particularly relevant in the wealth planning context:
- Residential real estate held exclusively for personal use is not subject to the reporting requirement, including a primary residence that is leased to third parties, but which the owner intends to reoccupy.
- No reporting is required with respect to a company, the sole purpose of which is to hold real estate for the personal use of the company’s owner(s).
Related BEA Forms & Other Upcoming Deadlines
The BE-10 is but one of a series of recently-revived BEA reporting requirements, including:
- Survey of New Foreign Direct Investment in the United States (Form BE-13), which requires reporting of new investments by foreign entities in the United States, where the costs involved exceed $3 million. Form BE-13 is due no later than 45 days after the date that the investment transaction occurs.
- Benchmark Survey of Foreign Direct Investment in the United States (Form BE-12), which aims at collecting information on U.S. inbound investments from foreign persons. Form BE-12 is essentially the inbound equivalent of Form BE-10, as it requires foreign persons to report their 10% or greater interests in U.S. business enterprises. Like Form BE-10, Form BE-12 is due every five years. The next BE-12 benchmark survey will be due in 2018, covering the 2017 fiscal year.
- Benchmark Survey of Financial Services Transactions between U.S. Financial Services Providers and Foreign Persons (Form BE-180), which is required of U.S. financial services providers or intermediaries that conducted transactions with foreign persons in excess of $3 million for the fiscal year covered by the survey. The next BE-180 benchmark survey will be due October 1, 2015.
Impact on the Wealth Management Industry
Because this is not a tax form, it applies even to entities that are disregarded for tax purposes. This means, for example, that a Venezuelan owner of a single member LLC owing a non-U.S. bank account through a non-U.S. entity may be caught by this reporting requirement. A trust under U.S. law, but a foreign trust for U.S. tax purposes, may also trigger a BE-10 reporting obligation. Further, unless one of the “personal residence” exceptions applies, U.S. trustees, acting as trustees of trusts holding non-U.S. real estate may also have BEA reporting obligations.
Below are three examples of items caught:
Voluntary Disclosure: U.S. person in voluntary disclosure, who held assets through a BVI company, even if that company is shammed out for U.S. tax purposes, it may be subject to BE-10 reporting as a “business enterprise.”
U.S. trust holding real estate outside the U.S.: A U.S. person holds Canadian real estate through a U.S. domestic trust and that real estate is held out to the general public for rental.
A U.S. law trust, but non-U.S. trust for tax purposes holding assets through an offshore company: U.S. law permits a non-U.S. person to create a U.S. law trust which will not be subject to U.S. tax. If it holds a non-U.S. company, such as a Singapore company, which qualifies as a “business enterprise” for BE-10 purposes, it too is caught by these reporting rules.
As Form BE-10 was not heavily publicized, it was not well known to practitioners or industry. However, clients and wealth management professionals should take immediate steps to determine whether BE-10 obligations apply to them with respect to their foreign holdings.