A Puerto Rico Trust is Considered Foreign: Reg. 301.7701-7(c)
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A Puerto Rico Trust is Considered Foreign
When it comes to Puerto Rico and the US Tax system, it can get very complicated on matters involving international reporting. That is because, on the one hand, Puerto Rico is a US Territory — but not one of the states in the United States – so depending on the type of disclosure required and particular Internal Revenue Code section, the asset in Puerto Rico may or may not be considered foreign. For example, a bank account located in Puerto Rico is not considered foreign, but residents of Puerto Rico are required to file FBAR. Likewise, Form 8621 is also required for US persons residing in Puerto Rico if they have foreign investment funds – but a Passive Investment Fund founded within Puerto Rico may be exempt as a PFIC depending on the type of ownership and status of the filers. What about a Puerto Rico Trust – is it considered a Foreign Trust that requires a Form 3520/3520-A?
A Puerto Rico Trust is Considered a Foreign Trust
Yes, a Puerto Rico Trust is Considered Foreign. Therefore, Forms 3520 and 3520-A are required.
Reg. 301.7701-7(c)(3)(ii)
Let’s take a look at how Regulation 301.7701-7 impact a Puerto Rico Trust:
(3) Definitions. The following definitions apply for purposes of this section:
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(i) Court.
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The term court includes any federal, state, or local court.
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(ii) The United States.
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The term the United States is used in this section in a geographical sense. Thus, for purposes of the court test, the United States includes only the States and the District of Columbia. See section 7701(a)(9). Accordingly, a court within a territory or possession of the United States or within a foreign country is not a court within the United States.
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(iii) Is able to exercise.
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The term is able to exercise means that a court has or would have the authority under applicable law to render orders or judgments resolving issues concerning administration of the trust.
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(iv) Primary supervision.
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The term primary supervision means that a court has or would have the authority to determine substantially all issues regarding the administration of the entire trust. A court may have primary supervision under this paragraph (c)(3)(iv) notwithstanding the fact that another court has jurisdiction over a trustee, a beneficiary, or trust property.
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(v) Administration.
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The term administration of the trust means the carrying out of the duties imposed by the terms of the trust instrument and applicable law, including maintaining the books and records of the trust, filing tax returns, managing and investing the assets of the trust, defending the trust from suits by creditors, and determining the amount and timing of distributions.
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Section 7701(a)(9) as to a Puerto Rico Trust
The interplay between 7701(a)(9) and a Puerto Rico trust as follows:
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(9) United States
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The term “United States” when used in a geographical sense includes only the States and the District of Columbia.
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Since Puerto Rico is not technically a State, a trust in Puerto Rico would presumably be a foreign trust, subject to the Form 3520/3520-A reporting requirements.
Form 3520 Amnesty for Puerto Rico Trusts
If you are out of compliance for not properly reporting your Puerto Rico trust as a foreign trust on Form 3520 and 3520-A, you may be subject to fines and penalties — but the penalties may be avoided, minimized, or abated through one of the IRS Offshore Amnesty Programs.
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Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure, including helping clients with late reporting of Forms 3520 and 3520-A.
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