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France Signed FATCA Agreement with US

On November 14, 2013, the US Treasury Department announced that it had signed an agreement with France relating to the implementation of the 2010 Foreign Account Tax Compliance Act (FATCA) law.

In order to implement FATCA worldwide, the U.S. Treasury Department has been aggressively negotiating intergovernmental agreements throughout the world, the latest one being France. The United States has previously signed nine other intergovernmental agreements with the United Kingdom, Denmark, Germany, Ireland, Mexico, Japan, Norway, Spain and Switzerland.

What is FATCA?

The Foreign Account Tax Compliance Act was enacted in 2010 as part of the HIRE Act of 2010. FATCA requires banks in France to report tax information about U.S. account holders to the French government. The French government will then send the information to the IRS.

FATCA also requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer’s annual tax return.  Reporting applies for assets held in taxable years beginning after March 18, 2010.  Failure to report foreign financial assets on Form 8938 will result in a penalty of $10,000 (and a penalty up to $50,000 for continued failure after IRS notification).  Further, underpayments of tax attributable to non-disclosed foreign financial assets will be subject to an additional substantial understatement penalty of 40 percent.

What does it mean?

Offshore accounts are now subject to increased scrutiny from the IRS. The goal of FATCA has always been to fight offshore tax evasion, and IRS regulations are becoming tougher and tougher.

“FATCA is a dragnet meant to force transparency and curtail tax evasion around the world,” Christine Ballard, an international tax specialist at the accounting firm Moss Adams, told the Wall Street Journal. “It affects millions of U.S. taxpayers both here and abroad. Some people are willfully evading U.S. taxes, while many others aren’t aware of the complex rules.”

When does it take effect?

The provision would require foreign financial institutions to report information about their U.S. account holders to the Internal Revenue Service (IRS) would take effect in July 2014. As the FATCA rules will be effective very soon,

US taxpayers should consider planning measures in response to them.  It is highly recommended for US taxpayers to review carefully and thoroughly their foreign assets (bank accounts, foreign investments, shares in foreign partnerships etc.) and how they are held which may help them understand better what kind of information concerning the taxpayer and the assets may be provided to the IRS by legal entities under FATCA rules. Taxpayers should also check if they are in compliance with the US filing requirements given the fact of the indefinite statute of limitations for certain US reporting forms.

USA – Immigration and Taxes: Residency Issues

The types of visas established for immigration purposes (immigrant visas vs. non-immigrant visas) are generally NOT the deciding factor in determining residency for tax purposes. Many times a nonresident alien for IMMIGRATION purposes may be a resident for TAX purposes. Thus, investors, tourists, athletes, entertainers, interns, students and scholars etc.… who are not citizens of the United Sates and who do not hold a green card must determine annually whether they are resident or nonresident aliens for tax purposes (to be discussed later). This determination is very important since it will allow you to know which forms to file and how your income is taxed.

IMMIGRATION LAW

From an immigration perspective, a nonresident alien is a person who is not a citizen or permanent resident of the U.S. The Immigration and Naturalization Service (INS) grants a “temporary” stay to nonresident aliens, which will end when the purpose of that stay has been met.

A resident alien, for IMMIGRATION purposes, is the same as an immigrant, or a “greed card” holder—a non-U.S. citizen who has been authorized to live and work in the U.S. indefinitely.

TAX LAW

A nonresident alien for tax purposes is somebody who is NOT a U.S. citizen or a green card holder (permanent resident) AND who does not meet the substantial presence test (see SUBSTANTIAL PRESENCE TEST later). Generally, a nonresident alien either pays U.S. tax only on income derived inside the U.S. or else is exempt from paying U.S. income tax because of a treaty between the U.S. and the government of his or her country of residence for tax purposes. Most nonresident aliens receive no tax exemption for their spouse or dependents. A nonresident alien for tax purposes must file an income tax return on IRS Form 1040NR (U.S. Nonresident Alien Income Tax Return).

A resident alien FOR TAX PURPOSES must pay tax on income from all sources, worldwide, and may in certain limited circumstances enjoy benefits of tax treaty exemptions. Individuals who are resident aliens for tax purposes can claim exemptions for dependents, while nonresident aliens generally may not. A resident alien for tax purpose files a return on IRS Form 1040, 1040A, or 1040EZ.

When a person who has been a nonresident for tax purposes becomes a resident for tax purposes under the rules discussed below, he/she will be taxed differently for the part of the year before becoming a resident and the part after becoming a resident. This is discussed in IRS Publication 519 under the heading “Dual Status”.

RESIDENCY DETERMINATION FOR TAX PURPOSES

Resident for Tax Purposes 

A resident for tax purposes is a person who is not a U.S. citizen and who meets either the “green card” test or the “substantial presence” test described in Publication 519, U.S. Tax Guide for Aliens. With regard to residency determination for tax purposes:

• F and J student visa holders are generally considered residents after their first five calendar years in the U.S.

• J non-students (researchers, scholars, teachers, etc.) are generally considered residents for tax purposes after their first two calendar years in the U.S.

• H-1s are considered residents for tax purposes once they meet the “substantial presence” test.

Nonresident for Tax Purposes 

A nonresident for tax purposes is a person who is not a U.S. citizen and who does not meet either the “green card” test or the “substantial presence” test described in Publication 519, U.S.

Tax Guide for Aliens. With regard to residency determination for tax purposes:

• F and J students are generally considered nonresidents during their first five (5) calendar years in the U.S.

• J non-students (researchers, scholars, teachers, etc.) are generally considered nonresidents during their first two (2) calendar years in the U.S.

• H-1s are considered nonresidents unless they meet the “substantial presence” test

GREEN CARD TEST

A person is a resident for tax purposes if he/she is a lawful permanent resident of the U.S.  In other words, a person has this status if the Immigration and Naturalization Service (INS) have issued him a “green card”. The person does not need to be in possession of the “green card” itself. The right to lawful permanent residence is granted at the time of the final interview with Immigration and Naturalization Service officials.

SUBSTANTIAL PRESENCE TEST

Counting Days 

A person is a resident for tax purposes if he/she meets the substantial presence test for the calendar year. To meet this test, the person must be physically present in the U.S. on at least:

31 days during the current year, (the year for which the tax return is being filed) and 183 days during the three-year period that includes the current year and the two years immediately before that, counting:

• All the days the person was present in the current year, and

• 1/3 of the days the person was present in the first year before the current year, and

• 1/6 of the days the person was present in the second year before the current year

DAYS THAT ARE NOT COUNTED

A J non-student (professor, researcher, etc.) who is substantially complying with the requirements of the visa does not count days for the first two calendar years.

An F or J student who substantially complies with the requirements of the visa does not count days for the first five calendar years.

CIRCUMSTANCES THAT DISQUALIFY FROM THE SUBSTANTIAL PRESENCE

TEST

There are certain circumstances that would disqualify a person from meeting the “substantial presence” test:

• He is present in the U.S. on fewer than 183 days during the current tax year

• It is established for the current tax year that the person has a tax home in the foreign country and that he has a closer connection to that country than the US.

IRS Publication 519 explains what is required to establish a closer connection to a foreign country, including such things as the location of a person’s permanent home, family, personal belongings, etc.