Ownership in Foreign Entity

Ownership in Foreign Entity

When a US taxpayer has ownership in a foreign entity (corporation or partnership), a further review of his/her US tax filing requirement is necessary to determine whether there are additional reporting related to the ownership of the foreign corporation. If the foreign corporation is deemed to be a Controlled Foreign Corporation, some if not all of the foreign corporation income might be required to be reported or even taxed in the US based on the US ownership.

U.S. persons with ownership interests in foreign corporations or partnerships are subject to special reporting rules. In addition to filing U.S. tax returns, U.S. persons are required to file information returns used by the IRS to collect information about cross-border activities of U.S. and foreign persons.

There are two information reporting forms are related to the foreign entity ownership reporting – Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” which is used to collect information about foreign corporations with U.S. owners, and Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships,” which is used to collect information about foreign partnerships with U.S. owners.

Properly complying with U.S. information return requirements has become much more important recently because the Service has put a much greater emphasis on ensuring international tax compliance. The penalties for failing to file Forms 5471 and 8865 were increased in 1997 to a minimum of $10,000 for each reporting period of each foreign corporation or partnership. Also, whereas previously the IRS was imposing these penalties very selectively, beginning with 2008 the Service started automatically imposing penalties for late-filed Forms 5471 and 8865.

Furthermore, the FATCA (Foreign Account Tax Compliance Act) provisions of the Hiring Incentives to Restore Employment (HIRE) Act 2 increased potential information reporting penalties. FATCA increased the accuracy-related penalty for understatement of income related to foreign financial assets that were not disclosed on Forms 5471, 8865, or certain other forms, from 20% to 40% of the understated amount. Additionally, FATCA indefinitely extends the general three-year statute of limitations if certain information returns, including Forms 5471 and 8865, are not filed.

Further information related to the foreign ownership in corporation can be found here: https://www.irs.gov/irm/part4/irm_04-061-007.html

We have extensive experience helping client to file the delinquent international information forms. Please feel free to contact us a free initial discussion if you have any questions.