Stop losing sleep over your tax situation. I'm Darrin Mish — a tax attorney in Tampa who's spent 32 years handling exactly this kind of problem. Here's what you need to know.
The Forms Stack Up Fast
You started a company in Mexico, Brazil, India, the U.K., Singapore, or another country. You may be a U.S. citizen who moved abroad and incorporated there. You may be a green card holder who owns a family business back home. You may have inherited a stake in a foreign company. In every case, the U.S. tax code has reporting requirements that attach the moment your ownership crosses certain thresholds.
The forms can total six or seven separate filings per year. Missing any of them carries penalties starting at $10,000 per form per year. The penalty stack on a foreign business owner who never filed can quickly exceed the value of the business itself.
Form 5471 – The Core Foreign Corporation Form
Form 5471 is required for U.S. persons with interests in foreign corporations meeting any of five filer categories under IRC Section 6038.
Category 1: U.S. shareholders of specified foreign corporations (relevant for the Section 965 transition tax).
Category 2: U.S. citizens or residents who are officers or directors of a foreign corporation, where a U.S. person acquired 10 percent or more of the stock or acquired additional stock crossing the 10 percent threshold during the year.
Category 3: A U.S. person who acquires (or disposes of) stock crossing the 10 percent ownership threshold, or who becomes a U.S. person while owning at least 10 percent.
Category 4: A U.S. person who had control of a foreign corporation (generally more than 50 percent ownership) for an uninterrupted period of at least 30 days during the year.
Category 5: A U.S. shareholder (10 percent or more by vote or value) of a controlled foreign corporation (CFC), defined as a foreign corporation more than 50 percent owned by U.S. shareholders.
The categories overlap. Most foreign business owners who are U.S. persons land in Category 4 or Category 5, often both. Each category requires different schedules within the same Form 5471 filing.
Form 8865 – Foreign Partnerships
Form 8865 is the foreign partnership counterpart to Form 5471. It is required under IRC Section 6038 for U.S. persons with interests in foreign partnerships meeting certain thresholds.
Category 1: U.S. persons who controlled the foreign partnership during the year (more than 50 percent of capital, profits, or losses).
Category 2: U.S. persons with at least 10 percent interest while the partnership is controlled by U.S. persons.
Category 3: U.S. persons who contributed property to a foreign partnership in exchange for an interest, where the contribution exceeds a threshold.
Category 4: U.S. persons with certain reportable events (acquisitions, dispositions, changes in proportional interest).
Many foreign business structures are partnerships under their local law – LLPs, GbR, OHG, kommanditbolag, sociedad civil. The U.S. classification follows the substance of the structure, not the local name.
Form 8858 – Foreign Disregarded Entities and Foreign Branches
Form 8858 is required for U.S. persons who own foreign disregarded entities or foreign branches under IRC Section 6038. The form is also required for owners of foreign branches operated in conjunction with foreign corporations or partnerships.
A foreign disregarded entity (FDE) is a foreign legal entity that has elected (or defaulted) to be treated as a disregarded entity for U.S. tax purposes. The entity exists under foreign law but is transparent for U.S. tax purposes.
Common examples: a U.K. limited company owned by a U.S. person who has filed a check-the-box election to treat it as a disregarded entity; a wholly-owned foreign subsidiary of a U.S. LLC; a foreign branch operation conducted by a U.S. corporation.
FBAR – Foreign Bank Account Reporting
If your foreign company has bank accounts and you have signature authority over them, you may have FBAR obligations even if you do not own the accounts personally.
FBAR (FinCEN Form 114) is required for U.S. persons with financial interest in or signature authority over foreign financial accounts exceeding $10,000 in aggregate at any time during the year.
For business owners and officers, the signature authority piece is the trap. You may have signature authority on dozens of corporate accounts as an officer. Each of those accounts contributes to the FBAR aggregate, and each must be reported.
Form 8938 – Specified Foreign Financial Assets
Form 8938 is the FATCA reporting form for specified foreign financial assets. The thresholds depend on filing status and residency.
For U.S. residents filing single, the threshold is $50,000 on the last day of the year or $75,000 at any time. For married filing jointly, $100,000 / $150,000. Higher thresholds apply for taxpayers living abroad.
Specified foreign financial assets include foreign bank and brokerage accounts, interests in foreign entities (subject to certain exceptions for entities reported on Form 5471, 8865, or 8858), foreign-issued financial instruments, and foreign pension and life insurance contracts.
For foreign business owners, the interest in the company itself may count toward the Form 8938 threshold if it is not otherwise reported on a Form 5471 or 8865.
The PFIC Layer – Form 8621
If your foreign company is a passive foreign investment company (PFIC), Form 8621 reporting applies in addition to the other forms.
A PFIC is a foreign corporation where either 75 percent or more of gross income is passive income, or 50 percent or more of assets produce (or are held to produce) passive income.
Holding companies, investment management entities, and certain real estate vehicles can hit the PFIC tests. So can foreign mutual funds and ETFs held inside a foreign corporate structure.
The PFIC tax regime is punishing. Default treatment imposes ordinary income tax rates and an interest charge on excess distributions and dispositions. Mark-to-market and QEF elections can soften this, but each requires ongoing compliance.
The Income Tax Layer – GILTI, Subpart F, PFIC Income
Beyond the information returns, the income tax mechanics for foreign business owners include:
Subpart F income under IRC Sections 951 through 964. Certain types of passive income earned by controlled foreign corporations are taxed currently to U.S. shareholders, even if not distributed.
GILTI (Global Intangible Low-Taxed Income) under IRC Section 951A. Active business income of controlled foreign corporations is taxed currently to U.S. shareholders at a reduced rate (with adjustments). The GILTI calculation is complex and often produces unexpected current tax liability.
Section 250 deduction. Corporate U.S. shareholders may claim a deduction reducing the effective GILTI rate; individual shareholders may make a Section 962 election to access similar benefits.
The 2017 tax reform (Tax Cuts and Jobs Act) created the GILTI regime and significantly changed the tax mechanics for U.S. shareholders of foreign corporations. The rules require careful annual analysis.
State Reporting
Some states (notably California) follow the federal Subpart F and GILTI rules. Others (notably Texas with its franchise tax) have their own foreign income provisions.
The federal and state mechanics can produce different results. A foreign business owner in California faces both federal GILTI and California’s conformity with parts of it. Texas residents have different state-level issues.
Three Steps for a Foreign Business Owner
First, classify the entity. Local law name does not control. The U.S. classification (corporation, partnership, disregarded entity) drives which forms apply.
Second, determine the filer category for each form. Most foreign business owners hit multiple categories on Form 5471 simultaneously. The schedules required vary by category.
Third, get the income tax mechanics right. Subpart F, GILTI, PFIC – the income side is often a bigger issue than the information returns. A foreign business that produces no distributions to the U.S. owner can still generate current U.S. tax liability.
Get the Reporting Right From the Start
After 32 years of working with cross-border business owners, the cleanest outcomes come from getting the U.S. reporting structure right from year one. Contact the Law Offices of Darrin T. Mish, P.A. at (813) 229-7100. We classify the entity, identify all required forms, and structure the filings so the penalties never come into play.