UK: Final Regulations Issued On Requirements For Certain Domestic Entities To Report Specified Foreign Financial Assets

Last Updated: 11 March 2016
Article by Jill Misener and Shira Peleg

The IRS has issued final regulations requiring certain domestic corporations, partnerships, and trusts to file Form 8938 to report specified foreign financial assets. The regulations went into effect on February 23, 2016, and apply to taxable years beginning after December 31, 2015. Failure to timely file Form 8938 may result in a maximum penalty of up to $60,000.

Section 6038D of the Internal Revenue Code, which was enacted in 2010 as part of the Foreign Account Tax Compliance Act (FATCA), requires individuals to report to the IRS interests in specified foreign financial assets by attaching Form 8938 to their annually filed federal income tax returns. Under § 6038D(f), the Department of Treasury and IRS are authorized to extend the Form 8938 filing requirements to "any domestic entity which is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets." Proposed regulations were published in December 2011, however, until now, only individuals were required to file Form 8938.

After consideration of various comments from practitioners, the Treasury Department and the IRS adopted proposed Reg. § 1.6038D-6 with few modifications. Most significantly, the final regulations simplify the process for determining which domestic entities must report specified foreign financial assets on a Form 8938. A brief summary of the changes adopted in the final regulations is provided below:

Clarification of Application of Reporting Threshold

Under the proposed regulations, a multi-prong test was used to determine if an entity was a "specified domestic entity" subject to a potential filing obligation. Under the test, in addition to satisfying other factors, an entity must have an interest in certain specified foreign assets that exceeded a reporting threshold. Once it was determined that an entity satisfied the definition of specified domestic entity, the same reporting threshold was applied to determine whether the entity had a filing obligation. That is, the reporting threshold was applied twice in determining an entity's § 6038D reporting responsibilities. The final regulations eliminate the application of the reporting threshold in determining whether an entity is treated as a specified domestic entity.

Elimination of the Principal Purpose Test

The proposed regulations provided that a corporation or partnership is treated as formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets if either: 1) At least 50% of its gross income or assets is passive; or 2) At least 10% of its gross income or assets is passive and the entity is formed or availed of by a specified individual with a principal purpose of avoiding § 6038D.

The new rules make it simpler to determine if an entity is a specified domestic entity by eliminating the principal purpose test for determining whether a corporation or partnership is a specified domestic entity. The "principal purpose" was a subjective test determined by the facts and circumstances. The final regulations allow taxpayers to rely on the objective 50% passive income or assets test to determine their reporting requirements under § 6038D.

Defining Passive Income

The final regulations also clarify the definition of passive income. The proposed regulations listed specific items that were defined as passive income for purposes of § 6038D. The final regulations are intended to define passive income consistent with the definition found in IRC § 1472, which was also enacted as part of FATCA. Both § 1472 and § 6038D use the definition of passive income to identify entities that have a high risk of being used for tax evasion and to reduce the compliance burden for active entities. Accordingly, the final regulations found in Reg. § 1.6038D-6(b)(2) largely mirror the definition of passive income set forth in Reg. § 1.1472-1(c)(1)(iv).

More specifically, final Reg. § 1.6038D-6(b)(2) adopts the following modifications of the definition of "passive income" from the § 1472 regulations:

  1. Clarifies that "dividends" includes substitute dividends, and expands "interest" to cover income equivalent to interest, including substitute interest;
  2. Adds a new exception for certain active business gains or losses for the sale of commodities;
  3. Defines notional principal contracts by adding a reference to Reg. § 1.446-3(c)(1); and
  4. Excludes from the definition of passive income rents or royalties derived in the active conduct of a trade or business conducted at least in part by employees of the entity.

Additionally, the final regulations adopt a rule found in the § 1472 regulations to provide guidance concerning how to determine whether 50% of an entity's assets are passive assets. Under the regulations, a weighted average test is used, and an entity may use the fair market value or of book value to determine the value of its assets.


Under the final regulations, a trust is a specified domestic entity if the trust has one or more specified persons as a current beneficiary. A current beneficiary is defined as any person who at any time during the taxable year is entitled to, or may receive, a distribution from the principal or income of the trust. The final regulations clarify that the term current beneficiary also includes any holder of a general power of appointment, whether or not exercised, that was exercisable at any time during the taxable year, but does not include any holder of a general power of appointment that is exercisable only on the death of the holder.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.