June 2009 Authors: Bobbe Hirsh bobbe.hirsh@klgates.com +1.312.781.6809 Scott D. Newman scott.newman@klgates.com +1.212.536.40549 Theodore L. Press ted.press@klgates.com +1.202.778.9025 András P. Teleki andras.teleki@klgates.com +1.202.778.9477 Roger S. Wise roger.wise@klgates.com +1.202.778.9023 K&L Gates is a global law firm with lawyers in 33 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com. IRS Continues to Focus on Foreign Account Reporting Deadline for the FBAR Filing Is June 30th The June 30 th deadline for US citizens and companies to report their foreign bank and financial accounts to the IRS is fast approaching, and the IRS has launched a new initiative to enforce compliance with this requirement. Thus, we would like to make sure that investment advisers and unregistered investment funds are aware of their reporting obligations in this area. In general, regulations require that any United States person having a financial interest in or signature authority, or other authority over a bank, securities, or other type of financial account ( Financial Account ) in a foreign country must report such relationship for each calendar year such relationship exists by filing Form TD F 90-22.1 (also known as the FBAR) (the Form ) with the Department of the Treasury on or before June 30 of the succeeding year (the Filing Requirement ). A new Form with additional instructions regarding who must file was issued by the IRS in October 2008. Noteworthy changes were expansions of the definitions of United States person, Financial Account, financial interest and signature authority. This means that some persons who were not required to file in the past are now required to file the Form. No report is required if the aggregate value of the Financial Account does not exceed $10,000 at any time during the calendar year. Like many other Bank Secrecy Act reporting forms, the purpose of the Form is to help identify potential money launderers, terrorist financing and persons seeking to evade taxes. Recently, the IRS has ushered in a new initiative to promote compliance by all persons required to file the Form. To Whom the Filing Requirement Applies The old instructions to the Form defined the term United States person as a citizen or resident of the United States, a domestic partnership, a domestic corporation or a domestic estate or trust. The new instructions to the Form broaden the definition to include not only a citizen or resident of the United States but also a person in and doing business in the United States. Although neither the old nor the new instructions specifically include a domestic limited liability company, the Bank Secrecy Act regulations from which the Filing Requirement arises define person to include all entities recognizable as legal personalities, which would presumably include limited liability companies. The change in definition of United States person has led to some confusion, especially with respect to the phrase person in and doing business in the United States. On June 5, 2009, the IRS announced that it was temporarily suspending the Filing Requirement for those persons who are not citizens, residents or domestic entities. The IRS stated in the announcement that all persons may rely on the old instructions with respect to the definition of United States person to determine whether they have an obligation to file an FBAR for the 2008 calendar year. Thus, as in years past, investment advisers and unregistered investment funds organized under U.S. law are subject to the Filing Requirement for
the 2008 calendar year generally only if they have a financial interest in or signature authority or other authority over a foreign Financial Account. How to Determine Whether the Filing is Required Given the approaching June 30 th deadline, as well as the severe civil and criminal penalties for even unintentional failure to file, investment advisers and unregistered investment funds should review their foreign Financial Account relationships to determine whether they must file the Form. Such a review should begin with determining whether the investment adviser or unregistered investment fund has a financial interest in or signature authority, or other authority over a Financial Account in a foreign country (a foreign country includes all geographical areas located outside the United States, Guam, Puerto Rico, U.S. Virgin Islands, and other U.S. territories). What Qualifies as a Financial Account? Financial Accounts generally include any bank, securities, securities derivatives or other financial instruments accounts. The instructions to the Form state that Financial Accounts generally also encompass any accounts in which the assets are held in a commingled fund, and the account owner holds an equity interest in the fund. Mutual funds were added as an example to the definition of Financial Account in the new instructions. Based on the foregoing, unregistered investment funds organized under U.S. law that invest in an offshore fund such as in a master-feeder structure would generally be required to file the Form. What is a Financial Interest? According to the instructions to the Form, a United States person has a financial interest in each account for which: 1. such person is the owner of record or has legal title, whether the account is maintained for his or her own benefit or for the benefit of others including non-united States persons. If an account is maintained in the name of two persons jointly, or if several persons each own a partial interest in an account, each of those United States persons has a financial interest in that account; or 2. the owner of record or holder of legal title is: (i) a person acting as an agent, nominee, attorney, or in some other capacity on behalf of the United States person; (ii) a corporation in which the United States person owns directly or indirectly more than 50 percent of the total value of shares of stock; (iii) a partnership in which the United States person owns an interest in more than 50 percent of the profits (distributive share of income); or (iv) a trust in which the United States person either has a present beneficial interest in more than 50 percent of the assets or from which such person receives more than 50 percent of the current income; or 3. a trust, or a person acting on behalf of a trust, that was established by the United States person and for which a trust protector has been appointed. A trust protector is a person who is responsible for monitoring the activities of a trustee, with the authority to influence the decisions of the trustee. This item was added to the new instructions in the fall of 2008. Who has Signature Authority, or Other Authority Over a Financial Account? Instructions to the Form state that a person has signature authority over a Financial Account if such person can control the disposition of money or other property in it by delivery of a document containing his or her signature (or his or her signature and that of one or more other persons) to the bank or other person with whom the account is maintained. Other authority exists in a person who can exercise comparable power over an account by direct communication to the bank or other person with whom the account is maintained, either orally or by some other means (e.g., e-mail). The new instructions add to the definition of other authority power over an account by indirect communication through an agent, nominee, attorney, or in some other capacity on behalf of the U.S. person. Therefore, it would be prudent to review the adviser s prime brokerage agreement as well as any other agreements related to any foreign Financial Accounts to determine which employees June 2009 2
and perhaps entities have authority to move monies or securities into and out of existing foreign Financial Accounts either directly or indirectly. What the Filing Requirement Means in Practice for U.S. Advisers. Typically U.S. advisers do not have financial interests in foreign Financial Accounts based on the definition of financial interest because (i) it is the unregistered investment fund that owns the assets, including any foreign Financial Accounts, and (ii) profit participation in the unregistered investment fund is typically less than 50 percent. However, individuals who have signature authority over an offshore account may have a filing requirement, with certain limited exceptions listed in the instructions. In addition, U.S. investors investing directly or indirectly in an offshore fund, and certain of their officers or employees, may also have a filing requirement, and U.S. advisers may want to alert their U.S. investors to seek guidance about the possible applicability of the foreign account reporting requirements to them. What if Reports were Due but not Filed in the Past? Penalties for failure to file the Form can be severe. The IRS has announced a voluntary disclosure program. No penalties will be imposed for the failure to file the Form in prior years if the late Forms are filed, along with a statement explaining why the Forms are being filed late, with the IRS by September 23, 2009, at the following address: Internal Revenue Service 11501 Roosevelt Blvd. South Bldg., Room 2002 Philadelphia, PA 19154 Attn: Charlie Judge, Offshore Unit, DP S-611 June 2009 3
The following examples illustrate situations in which an investment adviser or unregistered investment company fund generally will and will not be required to file the Form. Common Examples Situation Filing Required (/No) Rationale A domestic fund has an offshore bank or The fund has a financial interest in a foreign bank or securities account. An offshore fund has an offshore bank or A domestic fund invests in an offshore fund An offshore fund in which a domestic fund invests A principal or employee of an investment fund has signature authority over an offshore bank or A principal or employee of an investment fund who has authority to direct an offshore administrator to move monies or securities in an offshore account held at a different entity No No The offshore fund is not a United States person. The offshore fund appears to satisfy the definition of Financial Account as a commingled fund. The offshore fund is not a United States person. If an individual has signature authority, the individual would be required to file. Under the new instructions regarding signature authority, other authority exists in indirect as well as direct communications. A number of interpretative questions arise in connection with the completion of the Form. Therefore, please contact us or your tax preparer if you have any questions regarding the Filing Requirement, whether you are required to file the Form, or if you need help completing the Form. IRS Circular 230 Notice To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Code or (2) promoting, marketing, or recommending to another party any transaction or matter addressed herein. June 2009 4
Anchorage Austin Beijing Berlin Boston Charlotte Chicago Dallas Dubai Fort Worth Frankfurt Harrisburg Hong Kong London Los Angeles Miami Newark New York Orange County Palo Alto Paris Pittsburgh Portland Raleigh Research Triangle Park San Diego San Francisco Seattle Shanghai Singapore Spokane/Coeur d Alene Taipei Washington, D.C. K&L Gates is a global law firm with lawyers in 33 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com. K&L Gates comprises multiple affiliated partnerships: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the U.S., in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), and in Singapore (K&L Gates LLP Singapore Representative Office); a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; and a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners in each entity is available for inspection at any K&L Gates office. This publication is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer. 2009 K&L Gates LLP. All Rights Reserved. June 2009 5