A Helpful Reporting Exception for Employees and Officers of Foreign Companies
Sep 07, 2017
This post will give you the scoop on an important, but overlooked exception to the FBAR reporting requirement for employees and officers of foreign corporations. You might be surprised to know learn that certain U.S. persons may be required to file an FBAR even if they do not have a financial interest in a foreign financial account. Let that sink in for a second. FBAR reporting is required by a U.S. person who is an individual and who (alone or in conjunction with another individual) has signature or some other type of authority over bank, securities, or other financial accounts in a foreign (i.e., a non-United States) country. The preamble to the current regulations clarifies that an officer or employee who merely has supervisory control over a foreign financial account (i.e., the person can instruct others within the company to transfer or withdraw funds, but cannot directly transfer or withdraw funds) is not required to report such an account on an FBAR. This is because reporting is limited to those individuals who have control over the account through direct communication to the person with whom the financial account is maintained (source: 31 C.F.R. § 1010.350(f)(1)). The preamble also clarifies that only an individual (and not an entity) can have signature or other authority over an account (so a corporation should never complete Part IV of its FBAR). Now for the important part: the exceptions. Exceptions to the filing requirement for individuals with signature authority may apply to the officers and employees of six categories of entities subject to specific types of federal regulation, so long as the officers or employees have no financial interest in the reportable account and the foreign financial account is directly owned by the U.S. entity in which they serve as an officer or employee (source: 31 C.F.R. §§ 1010.350(f)(2)(i)-(v)). Officers and employees of the following “regulated entities” may qualify for the reporting exception:
- An entity with a class of equity securities listed (or American depository receipts listed) on any U.S. national securities exchange;
- An “Authorized Service Provider” that provides services to investment companies (U.S. mutual funds) registered with the SEC. An “Authorized Service Provider” is defined as an entity that is registered with and examined by the SEC and provides services to an investment company registered under the Investment Company Act of 1940;
- A bank that is examined by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, or the National Credit Union Administration;
- A U.S. subsidiary of a U.S. entity with a class of equity securities listed on a U.S. national securities exchange, as long as the subsidiary is included in a consolidated FBAR report filed by the parent;
- An entity that has a class of equity securities registered (or American depository receipts in respect of equity securities registered) under section 12(g) of the Securities Exchange Act (i.e., in general, corporations with more than $10 million in assets and at least 500 shareholders of record); and
- A financial institution that is registered with and examined by the Securities and Exchange Commission (“SEC”) or Commodity Futures Trading Commission.
Although, at first glance, this listing seems to exempt from the FBAR filing requirements U.S. individuals who are officers and employees of a broad range of regulated entities, the reporting exception is, in fact, quite limited in scope. It is not available to the following individuals:
- Officers and employees of a U.S. parent corporation who have signature authority over a foreign financial account of a U.S. or foreign subsidiary with regard to the subsidiary’s account. Similarly, officers and employees of a U.S. or foreign subsidiary who have signature authority over a foreign financial account of its U.S. parent do not qualify for the exception from reporting on the FBAR with regard to the U.S. parent company’s account. These exclusions from the reporting exception apply regardless of whether a consolidated FBAR report is filed;
- Officers and employees of U.S. subsidiaries of foreign corporations who have signature authority over foreign financial accounts, since the foreign parent itself is not required to file an FBAR and the U.S. subsidiary’s stock is not publicly traded. This rule applies even if the foreign corporation voluntarily files an FBAR report; and
- Officers and employees of U.S. or foreign subsidiaries of U.S. publicly traded corporations who have signature authority over foreign financial accounts directly owned by controlled foreign corporations (“CFCs”), even though the U.S. parent company is obligated to report the CFC’s foreign financial accounts in its own FBAR.
For a summary of some of the main tax Forms involved in the offshore disclosure process, check out this related blog post.