AMERICANS ABROAD BE AWARE OF THE FATCA
And avoid its negative consequences
What is FATCA?
The U.S. Foreign Account Tax Compliance Act ('FATCA') requires non-U.S. financial institutions (banks, insurance companies, investment companies, etc.) to provide information on their U.S. accounts to the IRS. To implement the FATCA provisions the U.S. and the Netherlands have concluded a separate intergovernmental agreement.
How FATCA reporting works?
Once ratified, the declaration implementing FATCA requirements by foreign countries will oblige the foreign financial institutions to report the accounts held by the U.S. individuals and businesses to their respective tax authority. The Tax Authority will then communicate that information with the IRS.
When it will start?
Financial institutions in the Netherlands, Croatia and many other countries have already started to assess client information which were disclosed to the Tax Authorities at the beginning of 2015. In September 2015 the tax authorities started exchanging financial information regarding 2014 (and not previous years).
What information will be shared?
The Foreign Tax Authority will provide the IRS with the following information:
•income from dividends and interest;
•proceeds from the sale of financial products.
What information will NOT be shared?
The following information will not be exchanged:
•the information held by governmental entities (e.g., Netherlands State Treasury Agency, Netherlands Municipalities Bank, etc.); Central Bank; international organizations; non-profit organizations;
•certain retirements accounts;
•certain other tax-favored accounts (Kapitaalverzekering Eigen Woning, Spaarrecht Eigen Woning, Stamrecht, levenslooprekening, levensloopverzekering and a levenslooprecht van deelneming concluded and maintained prior to 1 January 2012);
•an alimony annuity and any funeral insurance policy with a premium of € 1,000 per year or less.
What should non-compliant Americans do?
In anticipation of the impact of the FATCA, the IRS is allowing taxpayers to come clean and voluntarily rectify their non-compliance. In this respect, to avoid and prevent possible negative consequences of the FATCA reporting for non-compliant Americans the IRS has set up two programs.
•You can participate if you have not filed tax returns before;
•You are required to file only 3 years of delinquent tax returns;
•You need to report your non-U.S. bank accounts to the U.S. Department of the Treasury for the last 6 years (FBAR);
•No penalties are involved with this program.
B. Offshore Voluntary Disclosure Program (OVDP)
•Applies to all taxpayers not eligible for the streamlined filing process;
•You are required to amend your tax returns for the last 8 years;
•You need to report your foreign bank accounts for the period also going back 8 years;
•You need to pay a 20% penalty on any tax owed during the 8 years;
•In addition, you will have to pay a penalty amounting to 27.5% of the highest aggregate value in that 8-year period.
For Dutch: How to correctly and most beneficially report your Dutch income and assets on your Streamlined and OVDP tax returns?
1. Dutch employment / self-employment income - Form 2555
U.S. taxpayers living and working in the Netherlands are eligible for an exclusion of their foreign earned income up to $97,600 for 2013. Use Form 2555 to figure the foreign earned income (the income earned in the Netherlands through active duty) which is allowed to be excluded and your maximum exclusion amount. List the exclusion amount from Form 2555 on line 21 Form 1040 and make sure it is negative.
Note that the exclusion is not allowed against, amongst others, investment income, social security benefits, pension or severance payments
2. Dutch retirement income - Form 8833
Form 8833 is included to report all treaty based positions taken in the tax returns. For U.S. purposes, only contributions to a qualified U.S. plan made by the employer would be considered tax exempt. If a Dutch employer contributes to a Dutch pension plan on your behalf, the contributions are considered taxable and you would need to add those contributions to your income. However, on Form 8833 you can indicate that the income tax treaty applies and that based on the treaty, the Dutch employer contributions should be considered exempt similar to a U.S. plan.
3. Dutch kapitaalverzekering (an old type tax free savings plan often linked to the mortgage), levensloop and spaarloon - Form 8621 (PFIC)
The Dutch financial institutions typically report the year-end value of the fund, the dividend earnings and sometimes the gain or loss upon sale. However, there is no reporting of capital gain distributions which can be found on annual statements of the U.S. based financial institutions. Even if the Dutch financial institution is FATCA compliant, there is still no reporting of the capital gain distributions.
However, as a U.S. taxpayer, you are still required to report these capital gains distributions in your U.S. Federal (and state) tax return. In absence of this information, the IRS has implemented reporting rules based on Passive Foreign Investment Company ('PFIC') rules. There are several ways of reporting these gains how the two most commonly used are the excessive distribution method and the mark-to-market method.
Taxation of PFIC gains is different from regular gains. Regular gains are taxed in the year realized. PFIC gains are reported in the year realized, however, the tax due on the PFIC gain is calculated by allocating the gain evenly over the entire holding period (e.g. 10 years). On top of this, interest will be calculated on the tax as if it was owed the 10 years ago.
For each fund a separate Form 8621 needs to be filed.
4. Dutch bankspaaren (the replacement for kapitaalverzekering - a tax free savings plan not necessarily linked to the mortgage) - Form 8621 (PFIC) or Schedule B Form 1040
If a taxpayer uses the bankspaaren account to invested in mutual funds, it will be treated as a PFIC account. If the account is regular interest account, the interest and dividends should be reported on Schedule B Form 1040, parts I and II. On Part III you should tick 'yes' on line 7a. If your Dutch bank assets exceeded the $10,000 at anytime in during the reporting, then also tick the second 'yes'. On line 7b indicate the Netherlands.
If you have no interest or dividend income to report, the fact that you have a bank account outside the U.S. still requires you to prepare Part III of Schedule B Form 1040.
If you have sold any shares through a Dutch investment account you should complete capital gain and loss Schedule D Form 1040 and also Form 8949 listing purchase price, sales price and the respective dates. This also applies to funds held in mortgage linked investment accounts or offshore pension investment funds.
5. Property owned in the Netherlands - Form 8938
If you own a house in the Netherlands you might be required to file Form 8938. The Form is used to report foreign assets in your Federal tax return. The requirement for reporting is that the total value of all your specified foreign (including Dutch) assets in which you have interest is more than $200,000 on the last day of the tax year or $300,000 at any time during the tax year if you are filing as a single. If you are married and filing jointly the thresholds are $400,000 on the last day of the tax year and $600,000 at any time during the tax year.
Specified foreign financial asset are Dutch bank accounts, investments held with Dutch financial institutions, the value of your Dutch levensloop or bankspaar account, the mortgage linked investment account, the Dutch kapitaalverzekering and interest in a Dutch partnership. Dutch private retirement accounts such as lijfrenten and employee pension plans are also considered financial assets, however, these may be subject to special valuation rules and reviewed per account.
Dutch real estate is not a specified foreign financial asset required to be reported on Form 8938. However, if the real estate is held through a foreign entity, such as a corporation, partnership, trust or estate, then the interest in the entity should be reported on Form 8938 provided that the prescribed thresholds are met. Accordingly, the real estate itself is not separately reported on Form 8938, but rather the value of the interest in the entity is reportable.
Note: filing Form 8938 does not relieve you of the requirement to file the FBAR Form (FinCEN Form 114).
For other countries: please contact us for more information.