Asset Protection


New Law Is Death Knell for Foreign Bank Accounts for Americans

     In February 2009 UBS AG agreed to pay the U.S. government $780 million in penalties for assisting American taxpayers in hiding assets in offshore bank accounts. And, the Swiss government agreed to turn over to U.S. authorities the names of U.S. taxpayers with UBS accounts of more than 1 million Swiss francs ($993,000 USD), and also those holding suspicious accounts as low as 250,000 francs.

     In an effort to raise more taxes and curb tax evasion, President Obama signed into law the Hiring Incentives to Restore Employment Act on March 18, 2010. While the Act is titled as a jobs creation bill, it contains a number of provisions that makes it harder for Americans to evade taxes by hiding money in foreign bank accounts. The bill, aimed primarily at foreign financial institutions, provides for a 30 percent withholding tax on a foreign financial institution’s U.S. investments if it refuses to disclose information about accounts it has opened for U.S. citizens in offshore jurisdictions. The tax would be assessed on earnings generated by investments the foreign institution has in U.S. Treasury securities, stocks, bonds or debt and equity interests in American businesses.  The law covers any financial firm that trades assets for its own account or for clients, including banks, hedge funds, securities houses, derivatives dealers, commodity traders and private equity firms. 

     Also, contained in the Act is a provision that eliminates a derivatives strategy used by investors to evade paying taxes on dividends of U.S. corporations. Under the IRC, dividends paid by U.S. companies to foreign shareholders are to be taxed at 30 percent. For years, foreign banks structured deals using derivatives that allowed customers to turn dividends into “dividend equivalents” thus avoiding the tax. 

     The dividend equivalent scheme worked as follows: Say an investor holds shares of ABC, Inc. By entering into a swap agreement with a foreign financial institution, the investor can simultaneously sell his ABC shares a few days before the dividend is issued and receive a derivative tied to the value of the shares and the dividend payment.

      After ABC pays the dividend, the swap is canceled and the investor gets back the shares plus the dividend equivalent payment. The foreign financial institution that did the trade charges a fee linked to the tax savings the investor received. The new law eliminates the tax-free aspect of this transaction because it treats the swap payment a dividend.