Prologue – The “Take Away” And Summary For Americans Abroad
A Mexico Land TRUST, is not a FOREIGN TRUST for IRS purposes – ("cannot be what it isn't"). But, a Liechtenstein “Stiftung” – private FOUNDATION with no reference to the word TRUST is a FOREIGN TRUST for IRS penalty purposes – ("would be what it isn't"). https://t.co/3qaB8NWrnF pic.twitter.com/iHkZMP8iAS
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) November 16, 2022
The general message is contained in the above twitter thread. Americans abroad are likely to have financial involvements with a number of different kinds of “entities” that are “local” to them and “foreign to the United States. Examples may include: pension plans, tax advantaged savings plans, small business corporations and more. The descriptive title of these “entities” is irrelevant to their classification under US tax rules. What an individual understands to be a foundation, trust, corporation, pension or anything else could be classified under US tax rules in in a number of different (and unexpected) ways. The US classification for tax purposes will be determined by the “facts and circumstances” and characteristics of the entity. Furthermore, the classification will determine BOTH (1) how the entity is subject to US taxation and (2) the specific reporting requirements (and potential penalties) that apply to that entity.
(It is important for Americans abroad to understand the risk that income earned by the “foreign to the US” corporation or trust (but local to them) may be deemed to have been earned by the individual. This may be true even when that income has not been received by the individual. This is the consequence of Subpart F, GILTI and the Grantor trust rules. These specific topics will be left for separate posts.)