A simplified guide to the US Foreign Account Tax Compliance Act for American expats living in the Netherlands.
What is FATCA?
- FATCA is the short name for the US Foreign Account Tax Compliance Act.
- The law was voted in by Congress in 2010 as part of the Hiring Incentives to Restore Employment (HIRE) Act.
- The aim of FATCA is to identify US taxpayers who are hiding their wealth offshore in a bid to evade paying taxes.
- FATCA requires foreign financial institutions to report details of all accounts held or controlled by US taxpayers to the Internal Revenue Service (IRS).
In addition, FATCA has consequences for US nationals living abroad, which are outlined below.
How does FATCA affect US expats living in the Netherlands?
Depending on the amount of the aggregate value of their assets, US individuals are required to file Form 8938: Statement of Specified Foreign Financial Assets with their Form 1040 tax returns. Generally speaking, American expats should file this form if the aggregate value of their assets is higher than USD 50,000. However, this threshold is sometimes higher depending on certain circumstances. For a list of exact thresholds relating to specific circumstances, please refer to this link: www.irs.gov.
Specified Foreign Financial Assets include:
- depository or custodial accounts at FFIs,
- stocks or securities issued by foreign persons,
- a financial instrument or contract held for investment issued by a foreign country or party, and
- any interest in a foreign entity.
When do FATCA reporting obligation start?
As of January 2013, only individuals are required to report their foreign financial assets. At a later time, a limited set of US domestic entities also may have to report their foreign financial assets, but not for tax years starting before 2013.
How is failure to comply with FATCA punished?
The civil penalty for failure to supply this information is USD 10,000, with an additional USD 10,000 penalty up to a maximum of USD 50,000, after notice from the IRS.
Any understatement of tax attributable to an undisclosed foreign asset is subject to a 40 percent penalty.
FATCA and the Netherlands tax authorities
To ease the reporting burden for FFIs, the US and some other governments, like the UK, France, Spain, Germany, Japan and Italy, have agreed to share financial information about US citizens.
In a press release on 12 October 2012, the Dutch State Secretary for Finance announced that the Netherlands intends to sign an agreement with the US with respect to the application of the Foreign Account Tax Compliance Act (FATCA) under which all financial institutions have to provide worldwide information to the US tax administration (IRS) about their US clients.
The information will be exchanged through the Dutch tax administration on the basis of new legislation.
The following chart from the IRS website helps you to determine which types of foreign assets should be reported:
Types of foreign assets and whether they are reportable on Form 8938
|Financial (deposit and custodial) accounts held at foreign financial institutions||Yes|
|Financial account held at a foreign branch of an US financial institution||No|
|Foreign-issued life insurance or annuity contract with a cash-value||Yes|
|Foreign hedge funds and foreign private equity funds||Yes|
|Foreign real estate held directly||No|
|Foreign real estate held through a foreign entity||No, but the foreign entity itself is a specified foreign financial asset and its maximum value includes the value of the real estate|
|Foreign currency held directly||No|
|Precious metals held directly||No|
|Personal property, held directly, such as art, antiques, jewellery, cars and other collectibles||No|
|‘Social Security’-type program benefits provided by a foreign government||No|
For more information, you can view the IRS website.
Photo credit: JD Hancock