What are the U.S. Tax Implications of Owning an Interest in a Foreign Corporation?

Feb 11 2017

The U.S. taxes U.S. persons (U.S. citizens and greencard holders) on their worldwide income regardless of where they live.  A U.S. person owning a foreign (formed outside the United States) corporation will likely have U.S. tax and/or reporting obligations related to the business.

  • U.S. person who is an officer or director of a foreign corporation in which any U.S. person owns or acquires a 10% or more stock ownership interest
  • U.S. person who acquires a 10% or more stock ownership interest of a foreign corporation
  • U.S. person who had control (>50% interest) of a foreign corporation for at least a 30-day period during the year
  • U.S. person who owns stock in a foreign corporation that is a controlled foreign corporation for at least a 30-day period during the year

If your situation is described by one of the categories above, you have a Form 5471 reporting obligation. The extent of reporting depends on your category. Failing to file Form 5471 can result in a $10,000 penalty per year.

Form 5471 is an information return only. There is no income tax calculated on this form. If the foreign corporation is not engaged business in the U.S., the U.S. does not have jurisdiction to tax the income of the foreign corporation.  This allows for the deferral of U.S. taxation on this income until it is distributed to the U.S. shareholder. Any interactions between the U.S. person and the foreign corporation will likely have U.S. tax implications, regardless of the level of ownership. For example, if you are paid a wage or dividend from the company, that will be taxable income to you that needs to be reported on your U.S. tax return. Click here to read more about the best way to structure payments to you from the foreign corporation.

The IRS has laws in place to avoid the deferral of certain types of Subpart F income under a foreign corporation. This type of income will be taxable to the U.S. shareholder regardless of whether it was distributed to the U.S. shareholder.

As you can see, the structure of your business can have significant U.S. tax and reporting consequences.  In structuring your business, you will want to optimize the liability protection as well as the costs of formation and tax and reporting compliance. We can help in structuring your business. Contact us today to schedule a consultation.

©2017 SDC, LLC    www.sdcglobalcpa.com
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult tax, legal and accounting advisors before engaging in any transaction.

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