If you or your business have ownership of a foreign entity, you may have some specific tax reporting requirements. Here is a brief overview of the tax reporting requirements for different types of businesses. First, there is some specific terminology that applies to foreign tax:
A U.S. Person is an individual citizen or resident of the United States, but it can also refer a U.S. domestic partnership, corporation, non-foreign estate, or even a trust if owned by a U.S. Person(s) and exercised by a U.S. court.
A Controlled Foreign Corporation (CFC) is a foreign corporate entity whose stock is at least 50% owned by U.S. Persons.
Foreign LLC Taxes
Just like domestic Limited Liability Companies (LLCs), you can elect disregarded treatment for foreign LLCs. This is done with filing a Form 8832, Entity Classification Election. While this form only needs to be submitted once, if you own 100% of the foreign LLC you may also be required to submit a Form 8858, Information Return annually with your individual return.
If you don’t elect a disregarded status for your foreign LLC then, for tax purposes, it will automatically be treated according to foreign corporation guidelines.
Foreign Corporations
If you or your business has at least 10% ownership in a foreign corporation, or any percent of ownership of a CFC, you may be required to file Form 5471, Information Return. Form 5471 also applies to U.S. persons who are an officer or director of a foreign corporation they acquired stock in during the tax year.
If you own more than 10% of a foreign corporation’s stock, or if you transferred more than $100,000 to a foreign corporation at the end of the year, you are required to attach a Form 926, Return by a U.S. Transferor of Property to your individual return.
A domestic corporation that has 25% or more foreign ownership (directly or indirectly) also has filing requirements related to foreign activity. A Form 5472, Information Return must be attached to the reporting corporation’s income tax.
Foreign Partnerships
When a U.S. Person acquires, changes, or disposes of interest in a foreign partnership, they are required to include Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships with their annual return. If no one partner has controlling interest (50% stock ownership or more) of the foreign partnership, then any U.S. Person owning greater than 10% of the stock also has a requirement to file Form 8865.
If you have controlling interest in a foreign corporation, you should include a Form 8865 with your individual return. This form is fairly involved and requires roughly the same information as a Form 1065, Partnership return, including a profit and loss statement, balance sheet, schedule of owners, and more.
Report of Foreign Bank and Financial Accounts (FBAR) and More
Any U.S. Person, including companies, that have more than an aggregate value of $10,000 in foreign accounts at any time during the year are required to file a FinCEN Form 114, better known as an FBAR report. These foreign accounts include bank accounts, mutual funds, insurance policies and more.
Whether or not your foreign accounts produced taxable income is not a factor when determining if you must file an FBAR. The FBAR is not filed with your tax return, instead you must file electronically through the Financial Crimes Enforcement Network’s E-Filing System.
This is a very brief overview of some of the filing requirements for owning foreign corporations. If you suspect you might have a foreign filing requirement, it’s important to take action to find out exactly what you need so you can avoid the hefty penalties associated with failure to file.
Penalties
The penalties for failure to file a Form 5471 or 8865 on time can start at $10,000 per form, with an additional $10,000 for every month it is late after 90 days. Penalties for Form 5472 are even more steep, starting at $25,000 per missed Form, with another $25,000 every month it is late after 90 days. The 5471 and 8865 have a max penalty of 60,000, but the 5472 has no max penalty and will continue to increase until filed. If you have a partnership, these penalties apply to each partner.
If you accidentally fail to file an FBAR, you may be subject to a $10,000 fine, however, if the IRS finds that the failure to file was deliberate, the fines increase dramatically to the greater of either $100,000 or 50% of the balance of the account at the time of violation, or even jail time. These penalties are applied per year, not per account.
There are also many exceptions to these requirements that you may qualify for! If you have any questions about your filing requirements, or preparing the necessary forms, ADKF is here to help every step of the way.