Administrative Determination No. 23-03 (“AD 23-03”) – Requirement to Report Foreign Financial Accounts
By: Federico Aguirre
On August 30, 2023, the Puerto Rico Treasury Department (“Treasury”) issued the Administrative Determination No. 23-03 (“AD 23-03”) to provide guidance regarding the requirement to report “Foreign Financial Accounts (“FFA”).
AD 23-03 is based on the provisions of Section 1061.25 of the Puerto Rico Internal Revenue Code of 2011, as amended (the “Code”), which established a requirement for individual residents of Puerto Rico to report financial accounts held outside of Puerto Rico or the United States with a maximum value during the year of $10,000 or more. This requirement first applies for the taxable year 2022 and should be reported on Schedule CFF Individual (“Schedule CFF”), which is part of the Puerto Rico Individual Income Tax Return.
The purpose of AD 23-03 is to (1) establish the method to calculate the maximum value in a FFA; (2) clarify the definition of crypto assets and how their maximum value is determined; (3) clarify how married taxpayers or minors must report the CFF on their return; (4) report accounts that are excluded from the disclosure requirement; (5) establish the requirement to include the CFF when the owner of the account is an entity in which the taxpayer has a proprietary interest, and establish the treatment of FFA held on US possessions or military bases.
Calculation of the Maximum Amount
The maximum value of the FFA should be determined as follows:
1st Step: Determine the maximum value of each account (separately) in the functional currency of the FFA during the year. In the case that the account has assets that are not cash, or a combination of cash and other assets, the maximum value of the other assets would be a good faith estimate of the maximum value during the year.
2nd Step: If the functional currency of the account is not the U.S. Dollar (“USD”), the maximum amount determined pursuant to Step 1 should be converted to USD. The conversion should be made using the exchange rates (as of the last day of the calendar year) published by the Financial Management Service from the United States Department of Treasury.
The definition of CFF pursuant to Section 1061.25(b)(4) of the Code includes crypto assets. The term “crypto assets” include all goods or digital rights which transfers are verified, or which registries are maintained using a decentralized digital system known as blockchain. These include assets such as crypto coins, virtual coins, stablecoins and non-fungible tokens, among other assets.
Treasury determined that crypto assets accounts are considered FFA, unless it is maintained in an exchange or custody agent regulated by the Government of the United States (US) and cold or hot storage wallets under the custody of the taxpayer or the third party in Puerto Rico (PR) or the US.
In the case of crypto assets that do not have a USD conversion, the account should be reported on a Schedule CFF, although the value to be included on Schedule CFF would be zero.
Married and Minors Taxpayers
Married Taxpayers: Married taxpayers that file a joint return should report all their FFA in the Schedule CFF of their joint return. In the Schedule CFF, it should be marked the option of the owner of the account that corresponds between Taxpayer, Spouse or Both.
Married Taxpayers Filing Separate Returns: Spouses that file separate returns, or married taxpayers with a prenuptial agreement with complete separation of property, will only have to report on their Schedule CFF the FFA that are held individually or those in which the spouses maintain a financial interest. The taxpayer will not have to report in its returns the FFA in which only the spouse has an interest.
Minors: The parents, tutors or other responsible persons (all together the “Responsible Persons”) of minors are the responsible parties for reporting their FFA. Our interpretation of AD 23-03 is that Responsible Persons that are married taxpayers who file separate returns, or with a prenuptial agreement with complete separation of property, will have to report on their Schedule CFF 50% of the FFA in which the minor children have a financial interest.
FFA held by Legal Entities
The requirement to report the FFA is only applicable to individuals which are residents of PR. Therefore, legal entities (corporation, partnership, or limited liability company) are not required to report the FFA in which they have a financial interest in their income tax returns.
However, it will be understood that a resident individual has a financial interest over a FFA when the owner of record of a FFA is a legal entity in which the individual has (directly or indirectly) a proprietary interest of at least 50% of the shares or interest (by vote or value). In this case, the individual owner should report the FFA.
The requirement to report FFA does not apply to accounts which maximum value during the calendar year did not exceed $10,000. However, such exclusion will not be applicable in such cases in which the value of the FFA is zero because the maximum value during the year cannot be determined.
Furthermore, the following accounts will not need to be reported on Schedule CFF: (1) when the owner of the account is a government entity, including accounts of the Government of PR, Government of the US, Government of a foreign country or any political subdivision of one of these; (2) when the taxpayer’s financial interest is due to being the owner, officer, or employee of an International Banking Center (subject to Act No. 52-1989 or Act No. 273-2012) and as part of his function within the institution he has control over the disposition of any asset held in an account abroad; (3) individual retirement accounts (“IRA”), qualified under the Code or its equivalent under the Federal Internal Revenue Code, in which the taxpayer is the owner or beneficiary; (4) educational contribution accounts, in accordance with the Code, in which the taxpayer was the creator or is the beneficiary; (5) when the owner of the account is a retirement trust, qualified under the Code or its equivalent under the Federal Internal Revenue Code, in which the taxpayer is a beneficiary; and (6) accounts where the taxpayer only has the power to sign, without having a financial interest.
Possessions of the US and Military Bases
Financial accounts located in possessions of the US, including the US Virgin Islands and Guam, will be considered as located in the US. Therefore, they will not be considered FFA.
Furthermore, financial accounts in financial institutions located in military bases of the US will not be considered FFA, even when the branches of those financial institutions are located outside PR or US.
As summarized in this bulletin, AD 23-03 clarified certain requirements for reporting FFA on Schedule CFF. It is important to consider this guidance in the preparation of Schedule CFF when reporting FFA in the Puerto Rico Income Tax Return for the year 2022, and thereafter. Also, since this guidance was issued after the original due date of filing the income tax return, those that have already filed their income tax return should verify if any of the determinations in AD 23-03 will require them to amend their 2022 Puerto Rico Income Tax Return to include or correct the Schedule CFF.
The determination of which FFA should be reported and how they should be reported may not be that simple. Should you need assistance or if you have any questions, our tax professionals are available to assist you with these or any other tax-related matters.
About The Author
Federico is a Senior Manager at Alvarado Tax & Business Advisors LLC. Prior to that, he was a Manager at Zaragoza & Alvarado LLP. His Curriculum Vitae also includes previous experience in the corporate and individual tax advisory area with an international and a local firm.