Abstract: The US Tax Code and US foreign bank account reporting laws apply to US citizens living in Finland. Introduction to IRS and FATCA requirements.
Unlike citizens of Finland who are only subject to tax in Finland if they live here or have income from sources within Finland, US citizens, even those with dual Finnish-US citizenship, are subject to US taxation on their worldwide income regardless of where they live or the source of their income because the US has a citizenship based tax system. Any US citizen with worldwide income of the equivalent of $10,000 (US dollars) is required to file a US tax return annually even if no tax is due. US citizens are also required to file annually a report of financial accounts held at financial institutions located outside the US.
Citizenship Taxation – A Uniquely American Approach
The US is the only major country to tax its citizens on their worldwide income no matter where they live. Equally important, the US applies its Internal Revenue Code to its citizens living outside the United States as if they were living in the United States. In other words, all aspects of the US Tax Code apply to US citizens living in Finland, creating tax situations for them that do not exist for their fellow citizens living in the US.
Another not generally known fact is that everyone born within the borders of the US is a US citizen even if his or her parents were in the US only temporarily for study or work. Even if the person never obtains a US passport or social security number, he or she is a US citizen and subject to US taxation on his or her worldwide income. Not surprisingly, the conjunction of US birthright citizenship and citizenship taxation surprises many dual national US citizens living abroad. More often than not, these dual national Finnish-Americans are unaware of their US tax filing obligations and, as a result, are not current with their US tax filings.
Foreign Bank Account Reports (FBAR)
As if filing US tax returns was not pain enough, all US citizens are also required to file annually an FBAR (now called a FinCen 114) if the aggregate of the highest account balances in all of their financial accounts located outside the US exceeds the equivalent of $10,000 at any time during a tax year. The FBAR filing requirement is separate from the US income tax return and has a different filing deadline (June 30) than the tax return (June 15). Penalties for not filing FBARs can be significant. Non-willful failure is subject to a fine of up to $10,000 per account per year. Penalties for willful failure to file FBARs can involve civil penalties of as much as 50% of the high balance of each unreported account for each year that it is not reported and to criminal penalties.
A New US Enforcement Mechanism – The Foreign Account Tax Compliance Act Until recently the US Internal Revenue Service (IRS) could not easily detect non-filing by US citizens living overseas. That changed dramatically in 2010, when the US Congress passed The Foreign Account Tax Compliance Act (FATCA for short). FATCA imposed two regimes: one affecting individual US citizens and one affecting non-US financial institutions. The first required US citizens beginning with the 2011 tax year to file an additional form with their US tax returns identifying foreign financial accounts. The second requires non-US financial institutions to report US account holders to the IRS.
As of July 2014, Finnish financial institutions have had to institute due diligence procedures to establish when a new account is opened whether the account holder is a US person. These ‘US accounts’ will be reported to the IRS beginning in 2015. As of December 2014, Finnish residing outside the US who can establish that their nonfiling of US tax returns and FBARs was non-willful. Any US citizen living overseas who honestly did not know of their US tax and bank report filing obligations is eligible to use the SFOP. The SFOP requires US citizens to file tax returns for the three most recent tax years for which returns have not yet been filed and FBARs for the six most recent tax years without incurring any FBAR or tax penalties. Any tax that may be due for any of the three years must be paid plus interest, but all non-filing and late-filing penalties are waived. The SFOP offers US citizens an excellent chance to become compliant with their US tax and bank report filing obligations without incurring penalties.
Proper Coordination of Finland and US Tax Filings is Essential
As one would expect, Finnish tax professionals are experts in Finnish tax law and regulations
with the proper reporting of domestic and foreign income on a Finnish tax return. That is
sufficient for most of our clients, but for those with US citizenship, it is prudent to have US
tax professionals involved.
Remember, the US taxes its citizens as if they lived in the US. This presents unique
challenges to US citizens residing in Finland to make sure that the taxes paid in Finland are
properly presented on their US tax returns. It also requires that their activities in Finland be
assessed in light of how they will be taxed in the US and whether special US tax information
returns are required and, if so, properly prepared. We believe it is prudent for US citizens
living in Finland to coordinate their tax filings in both countries using the coordinated
services of firms with expertise in each country.
Author & contact information
Accounting Services Tilimatic Oy
Marcus von Schantz
Malminkatu 16 (Voimatalo), 6th floor
tel.+358 (0)9 618 881
fax. +358 (0)9 618 88228
contact [at] ast.fi
Client Case Study – Taxation of US Citizens Living Abroad
Kate has lived in Great Britain for most her life. She was born in the US while her parents,
both of whom were British citizens, were in the US. She returned with her parents to
England when she was three and has lived in the UK ever since. She has travelled to the US
on a UK passport with a US visa, issued by the US Consulate in London. Kate was advised
that she was a US citizen by birth and that US citizenship is automatic and non-consensual by
operation of the 14th Amendment of the US Constitution. Being a British citizen at birth did
not affect her US citizenship. As a US citizen, Kate is subject to US income taxation on her
Kate is now 52 and a successful business person. Kate worked for several years as an
executive at a technology company. Six years ago Kate started her own technology company
which has been successful. Kate has also invested in two other start-up companies for which
she is not actively involved.
Kate accumulated significant wealth and holds various investments. Kate is invested in non-
US mutual funds. Kate also holds non-US retirement accounts. Learning of her US tax
obligation, Kate sought help and found a UK accountant who our office coordinates with for
US tax preparation.
Work Flow Process:
Kate was initially sent the Client Intake Form, Tax Questionnaire, and the FBAR
Questionnaire to complete. Kate then met with the UK accountant and through a telephone
conference with our office there was an initial meeting to discuss her US tax filing
obligations. After the initial meeting, the questionnaires were reviewed to determine whether
they were complete and Kate was provided a flat fee quote to handle the work required to
make Kate compliant with her US tax filing obligations.
In order to become compliant with her US tax filing obligations, Kate was required to file
three years of tax returns and six years of foreign bank account reports. Under the new
streamlined filing compliance procedures Kate can now become compliant with her US tax
filing obligations without incurring any penalties.
Kate’s tax preparation is more complex because she owns interest in three non-US entities,
owns non-US mutual funds (which are considered Passive Foreign Investment Companies
(PFIC), and has non-US retirement accounts (which are considered foreign trusts for US tax
Kate’s primary business is considered a corporation for US tax purposes. The two start-ups that Kate is invested in are considered partnerships for US tax purposes. With our direction, the UK accounting firm organized the financial statements for each company in a manner that can be used on the US tax forms.
With our direction, the UK accounting firm also obtained the required information from the non-US mutual funds to report on the PFIC forms. The same occurred for the foreign trust reports required for the UK retirement plans. case is more complicated than the typical client and would result in a larger flat fee for both firms.
Add On Work:
Kate now uses the UK accounting firm for all of her accounting needs including local tax preparation. Through her experience she gained trust in the UK firm and with the annual US tax filing it made sense to use one firm.
There was also additional investment planning that resulted now that Kate must consider both UK and US tax consequences.