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Tax Planning For U.S. Fintech Companies

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From payment processors to money transmitters to crypto currencies and offshore banking, Fintech companies and its U.S. owners face a long list of tax filing requirements that get more complicated if the U.S. Fintech also owns foreign companies or a foreign company owns a U.S. Fintech.

If you a US citizen, Resident or Expat and an authorized signature in a Fintech foreign bank account with a balance that exceeds $10,000 at any time of the year, you are obligated to file Foreign Bank and Financial Accounts Report (FBAR).

Foreign Accounts Filing

  • FBAR (Foreign Bank Account Report)
  • FATCA (Foreign Account Tax Compliance Act)

FBAR 

1. You must file if you are a citizen or US resident.
2.  You have a financial interest in or signature authority over an account belonging to the Fintech in a foreign country.
3. That account is a Foreign Financial Account.
4. The aggregate value of the account(s) exceeds $10,000 at any time during the calendar year.
5. FBAR deadline to file is April 15. There is an automatic extension for October 15.

FBAR Record-Keeping Requirements

  • Account records must be maintained for five years. Exception: Fintech officers or employees who file an FBAR because of signature authority over the foreign financial account of their employers are not expected to personally maintain the records of these foreign financial accounts.
  • FinCEN 114a -Record of Authorization to Electronically File FBARs.

When You Should File FBAR

  • An FBAR should be filed on behalf for example if you are an authorized signatory in a Fintech foreign financial accounts.
  • Remember  tax filing status is not a consideration for FBAR.
  • An account with a financial institution, located in a foreign country, is a reportable account, whether the account holds cash or non-monetary assets or you are the owner of the account or just an authorized signature such as when the account belongs to the Fintech company itself.

FATCA

The Form 8938 was introduced as part of the Foreign Account Tax Compliance Act, which is referred to as FATCA. And similar to FBAR, FATCA’s purpose is to target tax noncompliance by U.S. taxpayers with foreign accounts and assets.

  1. FATCA focuses on reporting by U.S. taxpayers about certain specific foreign financial assets, which includes foreign financial accounts and other offshore assets, for example stock that a U.S. Fintech owns in a foreign company.
  2. FATCA also focuses on reporting by foreign financial institutions about financial accounts held by U.S. taxpayers or foreign entities in which a U.S. taxpayer holds a substantial ownership interest or is an authorized signature. 
  3. The filing of FATCA is in addition to the FBAR filing.
  4. If the total value of the foreign asset is at or below $50,000 at the end of the tax year, there is no reporting requirement for that year, unless the total value is more than $75,000 at any time during the year. This is different from FBAR that starts at $10,000.
  5. Specified foreign financial assets are defined as foreign financial accounts plus any stock or security issued by a person other than by a U.S person, any financial instrument or contract held for investment by a non-U.S. person, and any interest in a foreign Fintech or regular foreign entity.
  6. Essentially that means you have to report any foreign stocks or mutual funds not held inside a financial account, plus any interest in a PFICs — and PFICs are Passive Foreign Investment Companies — any interest in a foreign partnership, and a foreign corporation.

Keep in mind real estate is not considered a specified foreign financial asset required to be reported on the Form 8938 unless that real estate is held inside a foreign entity.

We are now at the last category of information returns related to reporting foreign financial assets. This is a list of some of the common foreign information returns other than the FBAR and Form 8938. It’s not an exhaustive list, just the most common.

  1. The Form 5471 is required when a U.S. person owns a controlled foreign corporation.
  2. The Form 5472 is required when there is a 25% foreign ownership of a U.S. corporation.
  3. Finally, the Form 8865 is required if a U.S. person has an interest in a foreign partnership.

Foreign Company Ownership Filing

The Trump tax reform created an additional layer of tax reporting for U.S. Fintechs owning foreign companies:

  • Repatriation tax.
  • Taxation of global intangible low-taxed income (GILTI).
  • Foreign derived intangible income (FDII).
  • Dividends received deduction (DRD).
  • Base Erosion and Anti-Abuse Tax.

Repatriation Tax

  1. The act includes a one-time transition tax based on the accumulated deferred foreign earnings of a specified foreign corporation.
    • An election may be made to spread the payment of the transition tax over an 8-year period.
    • S corporation shareholders may elect to defer payment of the tax until a triggering event occurs
      • When a triggering event occurs generally an election to spread the payment of the transition tax over an eight year period following the triggering event is available.
  2. A triggering event occurs when the corporation’s S election ends.
  3. A liquidation or sale of substantially all of the assets of the corporation, a cessation of business by the corporation, the corporation ceasing to exist, or any circumstances.
  4. A transfer of any share of stock in the S corporation by the taxpayer (only with tax attributable to the stock transferred).

GILTI

  1. Any 10% U.S. shareholder of a CFC is subject to a new anti-deferral regime starting with the CFC’s first tax year beginning in 2018
  2. The U.S. shareholder must include in gross income its GILTI.
    • GILTI means all net income of all CFCs, with limited exceptions for certain types of income over and above a deemed fixed return (10%) on all CFC’s tangible assets.
  3. U.S. C corporation shareholders are eligible for a deduction equal to 50% of the GILTI inclusion and the resulting 10.5% tax cut can be further reduced by 80% of the foreign tax credits on the CFC’s underlying income.
  4. The deduction is not allowed to an S corporation or its shareholders.
  5. Individuals can elect to be taxed as corporations to obtain the benefit of foreign tax credits on GILTI.
  6. GILTI once included in income can be actually repatriated to the U.S. shareholder without further tax, subject to foreign exchange gain or loss.

FDII Deduction

  1. If a U.S. Corporation earns FDII directly from foreign market transactions it is allowed a 37.5% deduction that results in a 13.125% tax rate.
  2. FDII is calculated in a manner similar to GILTI; it is the U.S. Corporation aggregate foreign market income to the extent it exceeds a fixed return on tangible assets.
    • To qualify as foreign market income the U.S. C corporation must earn it from the sale, exchange, lease or license of property to foreign persons for a foreign use or from services provided to foreign persons or with respect to foreign property.
  3. The FDII deduction is not available to an S corporation or its shareholders.

Dividend Received  Deduction DRD

  1. A US C corporation is entitled to a 100% DRD for dividends it receives from any 10 percent-or-greater owned foreign corporation.
    • To qualify for the DRD the US corporation must own the dividend-paying stock for 366 or more days during the 731-day period beginning 365 days before the stock becomes ex-dividend.
    • The deductions is disallowed for hybrid dividends (dividends for which the foreign corporation received a deduction or other tax benefit).
  2. No credit or deduction is allowed for foreign taxes (e.g. withholding taxes) with respect to dividends qualifying for the 100% DRD or hybrid dividends.
    • The DRD is not available to an S corporation or its shareholders.

Multiple State Tax Filing

U.S. Fintech companies face another challenge for example, if holding multiple state money transmitter licenses or if owning income producing offices in multiple states. Multiple state tax planning is critical as every state requires registration for doing business and some states such as California charge a nominal income tax to LLCs even if they are sole-member ones. 

In general, there are some taxes that a Fintech with multiple state operations will need to consider:

  • State Income Tax
  • Sales Tax 
  • Payroll Tax

State Income Tax

If you operate in more than one state, you have to pay taxes on the income your Fintech company earned in that state. Some states require the application of  apportionment formulas for payroll and sales tax calculation. In theory, you only pay tax on the income allocable to such state. 

Your Fintech company must file tax returns in each state it has a nexus or connection, even though your company classification is a LLC or S Corporation, which are also call pass-thru entities.

Payroll Tax

If your Fintech company hire employees in different states, be sure to check the state requirements for income tax and unemployment tax. States such as NY and California require the additional withholding of payroll taxes for the state.

Sales Taxes

Even if your Fintech company is not selling anything online, it’s good to know that most states require now the collection and remittance of sales tax regardless of your location in the U.S. This is a consequence of the U.S. Supreme Court approval of South Dakota’s use of an “economic nexus” for sales tax collections. Such decision requires that online sellers with sales over $100K coming from South Dakota sources or doing 200 or more transactions, collect and pay taxes to South Dakota Department of Revenue. There are other states taxing remote sellers following South Dakota.

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