Under the Foreign Account Tax Compliance Act, a substantial U.S. owner is a specified United States person who holds more than 10 percent of a foreign corporation, partnership, or trust. The threshold is set by 26 U.S.C. § 1473(2), and it decides whose name, address, and taxpayer identification number get handed to the IRS when a foreign entity or its withholding agent files FATCA paperwork. For investment vehicles, the threshold drops to zero, so any stake at all counts.
The 10 Percent Threshold by Entity Type
How you measure the 10 percent depends on what kind of foreign entity you’re looking at.
For a foreign corporation, you’re a substantial U.S. owner if you own, directly or indirectly, more than 10 percent of the stock by vote or by value. Voting shares that give you more than 10 percent of total voting power trigger the rule, and so do non-voting shares worth more than 10 percent of the corporation’s equity.
For a foreign partnership, the test is more than 10 percent of the profits interests or capital interests. That captures both the right to receive distributions and the economic stake in what the partnership actually owns.
For a foreign trust, there are two paths. Any specified U.S. person treated as the owner of any portion of a grantor trust under federal tax law is automatically a substantial U.S. owner, with no percentage floor. For non-grantor trusts, the threshold is more than 10 percent of the beneficial interests.1Office of the Law Revision Counsel. 26 USC 1473 Definitions
Zero Percent for Foreign Investment Vehicles
The 10 percent floor disappears when the foreign entity is a financial institution engaged primarily in investing or trading securities and similar assets. The statute substitutes “0 percent” for “10 percent” across all three entity types when the entity falls under the investment vehicle classification in 26 U.S.C. § 1471(d)(5)(C).1Office of the Law Revision Counsel. 26 USC 1473 Definitions
A hedge fund organized in the Cayman Islands can’t hide a U.S. investor behind a 9 percent slice. If you have any ownership stake in that fund, you’re a substantial U.S. owner, and the fund’s compliance obligations run to you personally.
Indirect and Family Ownership
Ownership is measured both directly and indirectly. If you hold your interest through another corporation, partnership, or trust, the Treasury regulations at 26 CFR § 1.1473-1 treat you as owning a proportionate share of whatever that intermediary entity owns in the foreign entity below.2eCFR. 26 CFR 1.1473-1 Section 1473 Definitions Stack a holding company on top of another holding company, and the interests still flow up to you.
Family attribution matters too. The regulations pull in the related-person rules under § 267(c), so interests held by a spouse, siblings, ancestors, and lineal descendants can be attributed to you to reach the 10 percent line. Ownership that runs through an entity is treated as actual ownership and can be attributed onward to family, but ownership already attributed from one family member can’t be attributed again to another. Splitting a stake across relatives or nested entities to stay below the threshold usually won’t work.
Who Counts as a Specified United States Person
The substantial-owner test only bites if you’re a “specified United States person” to begin with. That category starts with all U.S. citizens, residents, domestic partnerships, and domestic corporations, and then carves out a list of entities Congress considered low-risk:
- Publicly traded corporations and any corporation in the same affiliated group as a publicly traded corporation
- Tax-exempt organizations under 26 U.S.C. § 501(a), including charities, religious organizations, and educational institutions
- Individual retirement plans
- The United States government and its wholly owned agencies, along with state, local, and territorial governments and their agencies
- Banks as defined under federal tax law
- Real estate investment trusts
- Regulated investment companies (mutual funds)
- Common trust funds
- Certain tax-exempt trusts, including charitable remainder trusts
If an entity falls into one of those excluded categories, its stake in a foreign corporation, partnership, or trust doesn’t trigger the substantial-owner rules at all.1Office of the Law Revision Counsel. 26 USC 1473 Definitions
Why the Status Matters: Passive NFFEs
The practical weight of the substantial-owner definition lands on passive non-financial foreign entities. A foreign entity that isn’t a financial institution is classified as either active or passive, and only passive NFFEs have to name their U.S. owners.
An entity qualifies as active if less than 50 percent of its gross income for the prior year was passive income (dividends, interest, rents, royalties, and similar items) and less than 50 percent of its assets produce or are held to produce passive income.3eCFR. 26 CFR 1.1472-1 Withholding on NFFEs Operating businesses that make their money selling goods or services usually clear both tests. Publicly traded entities, government-owned entities, nonprofits, and start-ups within their first 24 months qualify as active under separate criteria.
Anything that doesn’t fit an active category is passive by default. A passive NFFE has to identify all of its substantial U.S. owners to any withholding agent making a payment to it. Refuse or fail to hand over the information, and the withholding agent must strip 30 percent off the payment.4Office of the Law Revision Counsel. 26 USC 1471 Withholdable Payments to Foreign Financial Institutions Active NFFEs, by contrast, can simply certify their status without naming any owners. So if you’re above 10 percent in a passive NFFE, expect your identifying details to move up the chain to the IRS.
How Your Information Gets Collected
Foreign entities gather substantial U.S. owner information on standardized IRS forms.
Form W-8BEN-E is the certification a foreign entity gives to a U.S. withholding agent. It declares the entity’s FATCA classification (active NFFE, passive NFFE, participating FFI, and so on) and identifies substantial U.S. owners. Part XXIX of the form asks for the name, address, and taxpayer identification number of each substantial U.S. owner of a passive NFFE.5Internal Revenue Service. Instructions for Form W-8BEN-E
Form W-9 is used when the substantial U.S. owner is asked to certify status and hand over a taxpayer identification number directly. Without a TIN, the reporting chain doesn’t work: the IRS can’t match a reported foreign asset to a domestic return.
Your Own Reporting Obligation: Form 8938
Being identified by a foreign entity is one side of FATCA. The other side is what you file yourself. Individual U.S. taxpayers who hold specified foreign financial assets above certain thresholds have to attach Form 8938 to their annual tax return. Thresholds depend on filing status and where you live.6Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets
If you live in the U.S., single filers and married-filing-separately taxpayers file when total value exceeds $50,000 on the last day of the year or $75,000 at any point during the year. For married filing jointly, the thresholds are $100,000 and $150,000.
If you live abroad, the thresholds are higher: $200,000 and $300,000 for single or married filing separately, and $400,000 and $600,000 for married filing jointly.
Form 8938 covers more than just accounts. It also reaches foreign stock and securities held outside a financial account, foreign partnership interests, and interests in foreign hedge funds or private equity funds. It’s not the same as the FBAR (FinCEN Form 114), which is filed separately with FinCEN and covers foreign bank accounts with a combined balance over $10,000 at any point in the year. Some assets show up on both forms, and filing one doesn’t excuse the other.7Internal Revenue Service. Comparison of Form 8938 and FBAR Requirements
Penalties If You Don’t File
Missing Form 8938 when you’re required to file triggers a $10,000 penalty. If the IRS notifies you and you still don’t file within 90 days, another $10,000 accrues for each 30-day period of continued non-compliance, up to a maximum of $50,000 in additional penalties.8Internal Revenue Service. Instructions for Form 8938
If an undisclosed foreign asset produces an underpayment of tax, the accuracy-related penalty runs to 40 percent of the underpayment. Fraud raises that to 75 percent, and willful failures can be prosecuted criminally.8Internal Revenue Service. Instructions for Form 8938 Omitting more than $5,000 of gross income attributable to a specified foreign financial asset also gives the IRS six years from the filing date to assess tax, whether or not Form 8938 was otherwise required.9Internal Revenue Service. Summary of FATCA Reporting for U.S. Taxpayers
If you’re above the 10 percent line in a foreign corporation, partnership, or trust — or hold any stake at all in a foreign investment vehicle — you’re inside the FATCA reporting perimeter. The foreign entity will identify you, and your own filings need to line up with what it reports.