Even if your business is registered in another country, the U.S. government still wants information– and most likely income taxes even if the foreign entity pays tax offshore. How foreign business owners go about staying compliant with U.S. tax law depends on the type of offshore business concerned.
Different foreign information reporting forms are required to report offshore corporations, LLCs, partnerships, and business and foreign financial accounts. Filing correctly may prove to be a complicated endeavor, but you should never just submit and hope, as the possible penalties could be devastating.
For this reason, the Dual Licensed International & Domestic Tax Attorneys and CPAs at the Tax Law Offices of David W. Klasing are here for you. To get immediate help with whatever domestic and international tax issues you may be facing, contact us as soon as possible by calling (800) 681-1295.
Reporting Requirements for Foreign-Registered Corporations
Any U.S. taxpayer with an interest in a corporation that is registered in a foreign country may have to declare their interest to the federal government as part of their annual income tax return.
Criteria for Determining a reportable “Interest” in a Foreign-Registered Corporation
A person can have a reportable “interest” in a foreign corporation in a number of ways. Below are some of the example scenarios that would create an interest that would require reporting:
- The taxpayer acquires or disposes of at least 10% of the foreign corporation at some point during the tax year.
- The taxpayer is an officer or director of the foreign corporation that is at least 10% owned by a U.S. person.
- The taxpayer controls a foreign corporation (or holds more than 50% of the voting shares).
- The taxpayer and their non-U.S. resident spouse collectively own more than 50% of a foreign corporation or control more than 50% of voting shares, regardless of the division between the spouses.
- The taxpayer has more than 10% of the shares of a controlled foreign corporation (CFC), a term used to refer to foreign corporations controlled by U.S. persons or entities.
These criteria are often more complicated when complex business ownership structures are involved, so if you are not sure whether you have to report your interest in a foreign corporation, we urge you to discuss these issues with one of our Dual Licensed International Tax Attorneys and CPAs.
Reporting Guidelines for a Foreign-Registered Corporation
Disclosing an interest in a foreign-based corporation is done by submitting IRS Form 5471. Form 5471 is one of the more complex filing documents that the government can request, so it is important to have seasoned international tax help when preparing your filing.
In some cases, filing Form 5471 can result in additional U.S. income tax. Since 2017, owning a foreign corporation may call for additional U.S. taxes on the corporation’s earnings if they have not already been subject to foreign taxes. This is known as global intangible low taxed income (GILTI) and is reported on Form 8992. If you are a business owner in a foreign country that taxes corporate income at a rate that is at least 90% of the applicable U.S. corporate income tax rate, you are exempt from GILTI taxes.
Reporting Requirements for Foreign-Registered Limited Liability Corporations (LLCs)
Foreign-registered single member LLCs that are owned by U.S. taxpayers are not automatically treated as disregarded. When a U.S. single member LLC is a disregarded entity, income from the LLC is reported on the owner’s tax return. With a foreign single member LLC, the taxpayer may have to submit additional foreign information returns including a Form 5471.
To treat a foreign-registered LLC as a disregarded entity, you first have to obtain a U.S. Employer ID Number (EIN). Then, Form 8832 can be submitted to elect to treat the LLC as disregarded. Once the entity has been properly established as disregarded, Form 8858 must be filed annually with the IRS. It is much simpler than Form 5471.
Reporting Requirements for Foreign-Registered Partnerships
U.S. taxpayers may have reportable interests in foreign partnerships involving non-U.S. people and partnerships registered outside of the country. If so, the taxpayer may have to use IRS Form 8865 to disclose their foreign partnership activity and income.
Taxpayers with foreign-registered partnerships interests must file Form 8865 if any of the following are true:
- The taxpayer has a controlling interest in the partnership (or more than 50% ownership).
- The taxpayer acquired, disposed of, transferred, or otherwise changed their interest in the partnership during the tax year.
- The taxpayer has more than 10% ownership in the partnership, which is controlled by a U.S. person or persons.
Required information to fill out Form 8865 will be similar to what a taxpayer might have to report for a U.S.-based partnership. This will include information about the individual partners, respective ownership interests, investment amounts, balance sheets, and profit and loss statements. If you need help preparing this information, it is always best to utilize the services of a Dual Licensed International Tax Attorney and CPA so that you don’t make any costly mistakes.
Reporting Requirements for Foreign Bank and Financial Accounts
Regardless of whether your business is registered in a foreign country, all business accounts and foreign financial accounts housed by foreign banks or other financial vehicles are subject to information reporting requirements. Specifically, any taxpayer who has a combined total of $10,000 or more in overseas accounts must file a Report of Foreign Bank and Financial Accounts (FBAR).
The value threshold for this requirement is cumulative, meaning that the number to compare against the $10,000 figure is the highest total amount of all foreign accounts under your control at their combined highest value at any point of the taxable year.
There are no taxes associated with the FBAR, but the penalties for failing to file an FBAR where required can be substantial, whether you are aware of the requirement or not. Therefore, it is vital that you use a Dual Licensed International Tax Attorney and CPA who is familiar with the disclosure requirements to help you assess your financial situation and help you prepare your disclosures.
Questions About Reporting a Foreign Business? The Tax Law Offices of David W. Klasing Can Help
The Dual Licensed Tax Lawyers and CPAs at the Tax Law Offices of David W. Klasing can help you avoid getting into trouble with reporting requirements for your foreign business. Call (800) 681-1295 to learn more today.
If you have failed to file foreign information reporting returns and include taxable offshore income on your U.S. tax returns for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosurebefore the IRS has started an audit or criminal tax investigation / prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
It is imperative that you hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney Client Privilege and Work Product Privileges that will prevent the very professional that you hire from being potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended, in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime in itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. See our Testimonials to see what our clients have to say about us!
See our 2011 OVDI Q and A Library
See our FBAR Compliance and Disclosure Q and A Library
See our Foreign Audit Q and A Library
