FATCA. FBAR. PFIC. Trump, let your people go!! Few are the examples where the multi-level complexity of the U.S. tax system can be seen as is the case with the regulation and taxation relating to foreign financial accounts held in foreign financial institutions by U.S. Persons. From the U.S. perspective, identical or effectively identical terms have completely different meanings and implications, whether we are looking at the FATCA, FBAR or PFIC regimes. With regard to FATCA, and what Israeli financial institutions must disclose, FATCA requires that entities such as banks and investment entities disclose financial accounts of U.S. Persons. Attorney trust accounts are generally excluded from FATCA but what about Israeli pension funds? Here the answer is less clear. Annex II Section II (B) of the U.S.-Israel FATCA agreement states that “Broad Participation Pension Funds” are deemed “Non-Reporting Israeli Financial Institutions” exempt from FATCA if the following conditions are met: - The pension fund is subject to Israeli regulation and provides the Israel Tax Authorities annual information reporting about its beneficiaries. - At least one of the following requirements: o The fund is generally exempt from tax in Israel on investment income under the laws of Israel due to its status as a retirement or pension plan, or o At least 50 percent of its total contributions are received from the employers, or o Distributions or withdrawals from the fund are allowed only upon the occurrence of specified events related to retirement, disability, or death, or o Contributions to the fund are limited by reference to earned income of the employee or may not exceed $50,000 annually. To summarize, certain Israeli financial institutions must comply with FATCA, while others need not.

How do these definitions apply to FBAR obligations? FBAR regulations require U.S. Persons to disclose financial interest in, or signature or other authority over, financial accounts. Reportable financial accounts are defined broadly to include all types of bank accounts or any other account maintained with a financial institution. The term explicitly includes accounts held by a person that is in the business of accepting deposits as a financial agency, or accounts that involve an insurance or annuity policy with a cash value. Under FBAR, there is no exception for Israeli pensions as is the case of FATCA. Furthermore, under FBAR, the term “financial institution” is not defined. Thus common wisdom is it that under FBAR, there is an obligation to disclose pension accounts, Keren Hishtalmut accounts, etc. Finally, how do these terms relate to PFIC? While PFIC uses different terminology it relates to the same subject matter exactly. PFIC governs nonU.S. corporations in which one of the two following tests are met: (1) income test: where 75% or more of the foreign corporation's gross income is passive income (interest, dividends, etc.), or (2) asset test –where 50% or more of the foreign corporation's assets produce passive income. And if a U.S. Person holds any interest whatsoever in a PFIC, draconian tax and reporting implications arise. PFICs, as defined by the U.S. tax code, include foreign-based mutual funds, partnerships and other pooled investment vehicles having at least one U.S. shareholder. Accordingly, any U.S. Person residing in Israel holding any interest in such companies must comply with PFIC, independent of any FBAR obligations. How does PFIC relate to Israeli pensions and other retirement related savings? Clearly such funds are PFICs. Does this mean that the harsh reporting and tax obligations apply? As stated in a separate article [i] there is a solid argument that such retirement accounts are exempt from PFIC under trust theory in certain cases. To summarize, U.S. tax law is notorious for its many layers, which in many cases govern identical issues in conflicting and/or duplicative ways. Trump, let your people go! Monte Silver

Monte Silver is a U.S. lawyer based in Israel specializing in U.S. tax matters. He formerly worked for the Internal Revenue Service and the U.S. Tax Court. This article does not constitute legal advice. Please contact us if you have further questions.

[i]

https://drive.google.com/file/d/0B5AdCN6UwPGPYkJTQUhnWXc3M2M/view?ths=true