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Tax Advice for Specific Needs
As more business is conducted internationally, more US citizens are involved with foreign businesses. Depending on the type of foreign business that is being conducted, there are different applicable reporting requirements for US tax purposes.
This article describes the significant US reporting requirements for US citizens with foreign businesses.
If a US citizen is involved with a foreign corporation, a key reporting requirement is Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations”.
There are generally five categories of US citizens who are required to file Form 5471:
As an additional key reporting requirement for a US citizen involved with a foreign corporation, a US citizen who transfers certain property to a foreign corporation is required to file Form 926, “Return by a U.S. Transferor of Property to a Foreign Corporation”. Transfers of cash to a foreign corporation that result in a US citizen holding, directly or indirectly, at least 10% of the stock of the corporation or that aggregate more than $100,000 over a 12-month period are examples of property transfers that can require the filing of Form 926.
Form 5471 and Form 926 are filed with the US citizen’s income tax return.
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If a US citizen is involved with a foreign partnership, a key reporting requirement is Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships”.
There are generally four categories of US citizens who are required to file Form 8865:
Form 8865 is filed with the US citizen’s income tax return.
Under Form 8832, “Entity Classification Election”, a foreign limited liability company can elect to be classified as:
If electing to be classified as an association taxable as a corporation, the foreign limited liability company will be subject to foreign corporation reporting requirements (including Form 5471 and Form 926 as described above). If electing to be classified as a partnership, the foreign limited liability company will be subject to foreign partnership reporting requirements (including Form 8865 as described above).
If electing to be classified as a disregarded entity, the foreign limited liability company does not file a separate tax return, but instead the tax attributes of the limited liability company flow through to the US income tax return of the single owner of such limited liability company.
A US citizen who is the single owner of a “disregarded entity” foreign limited liability company generally is required to file Form 8858, “Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)”. Form 8858 is filed with the US citizen’s income tax return.
If a US citizen is involved with a foreign trust, a key reporting requirement is Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”.
A US citizen generally is required to file Form 3520 when:
Form 3520 is due on the 15th day of the fourth month following the end of the US citizen’s tax year.
As an additional key reporting requirement for a foreign trust, a foreign trust with a US person (including a US citizen) that is an owner of any portion of the foreign trust under the “grantor trust” rules is required to file Form 3520-A, “Annual Information Return of Foreign Trust With a U.S. Owner”. While Form 3520-A is filed by a foreign trust, the US person (including US citizen) “owner” of the foreign trust is responsible for ensuring that the foreign trust files Form 3520-A.
Form 3520-A is due by the 15th day of the third month following the end of the foreign trust’s tax year.
While, as described above, there are different reporting requirements for foreign corporations, foreign partnerships, foreign limited liability companies, and foreign trusts, there is one reporting requirement applicable to each of these entities – Report of Foreign Bank and Financial Accounts (FBAR).
A US citizen must file an FBAR form to report a financial interest in or signature or other authority over at least one financial account located outside the United States if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported. Thus, a US citizen who has a signature or other authority over at least one foreign financial account of a foreign corporation, foreign partnership, foreign limited liability company, or foreign trust with an aggregate value of more than $10,000 is required to file an FBAR form.
The FBAR form (also known as FinCEN Form 114) is due on April 15 (with an automatic extension to October 15) for the prior calendar year.
Know Your Form of Business Entity
The terms “foreign corporation”, “foreign partnership”, “foreign limited liability company”, and “foreign trust”, used above are all US terms. Many foreign countries use their own language and terminology to define business entities in their countries. It is important for a US citizen with a foreign business to know how the Internal Revenue Service classifies such business.
For example, on Form 8832, certain foreign entities are classified as corporations for US tax purposes. These include a Public Limited Company in Australia, a Sociedade Anonima in Brazil, an Aktiengesellschaft in Germany, a Kabushiki Kaisha in Japan, and an Anonim Sirket in Turkey.
Failure to file any of the reporting forms described above is not a minor matter. A US citizen can be subject to significant penalties if these reporting forms are not timely filed.
Failure to timely file Form 5471, Form 8865, or Form 8858 can subject a US citizen to civil penalties of at least $10,000 and loss of 10% of foreign tax credits, as well as criminal penalties.
For failure to timely file Form 926, a US citizen can be subject to a civil penalty equal to 10% of the fair market value of the subject transferred property at the time of transfer.
If Form 3520 is not timely filed, a US citizen can be subject to a civil penalty generally equal to at least the greater of $10,000, 35% of the gross value of any property transferred to the foreign trust, 35% of the gross value of any distributions received from a foreign trust, or 5% of the gross value of the portion of the foreign trust’s assets treated as owned by the US citizen under the “grantor trust” rules.
If Form 3520-A is not timely filed, a US citizen can be subject to a civil penalty equal to at least the greater of $10,000 or 5% of the gross value of the portion of the foreign trust’s assets treated as owned by the US citizen under the “grantor trust” rules.
Failure to timely file an FBAR form can subject a US citizen to (i) for a “non-willful” failure, civil penalties of at least $14,489 (to be adjusted annually for inflation), and (ii) for a “willful” failure, civil penalties of at least the greater of $144,886 (to be adjusted annually for inflation) or 50% of the balance in the foreign financial account and criminal penalties.
At Greenback Expat Tax Services, we specialize in helping expats manage their US tax obligations. As part of our services, we have the necessary experience to aid expats with the numerous US reporting requirements for foreign businesses (including those not included in this article). Given the severe penalties that otherwise can be assessed, expats need our expert CPAs and IRS-enrolled agents to monitor and ensure compliance with US reporting requirements for foreign businesses.