The Internal Revenue Service issued final regulations to define when a domestic entity is considered a specified domestic entity that must report specified foreign financial assets in which it holds an interest. These regulations, which apply to certain domestic corporations, partnerships and trusts, adopt the 2011 proposed regulations with just a few changes, including the elimination of the proposed “principal purpose test” for determining whether a corporation or partnership is a specified domestic entity.
These final regulations are generally effective for tax years beginning after December31, 2015. The rules explain how to determine whether 50% of the entity’s assets are passive (and thus, treated as formed to hold specified foreign financial assets) by allowing partnerships or corporations to use either the fair market value or book value method when determining the asset value.
Reporting of assets held in a foreign (non-United States) jurisdiction continues to be an area of focus for Congress and the Internal Revenue Service with exceedingly harsh penalties for non-compliance. Thus, it is critical that American taxpayers electing to invest outside the borders of the United States be familiar with these rules and the administrative necessity of meeting all reporting requirements.