Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships, is required of four different categories of filers:
- U.S. person who controlled (>50% interest) the foreign partnership at any time during the partnerships’ tax year
- U.S. person who owned a greater than 10% interest in the partnership while the partnership was controlled by U.S. persons each owning at least a 10% interest
- U.S. person who contributed property in exchange for an interest in the partnership
- U.S. person who acquires a 10% or more interest in the foreign partnership
If your situation is described by one of the categories above, you have a Form 8865 reporting obligation. The extent of reporting depends on your category. Failing to file Form 8865 can result in a $10,000 penalty per year.
Form 8865 is an information return only. There is no income tax calculated on this form. While the U.S. will not have jurisdiction to tax the partnership income (assuming it is not doing business in the United States), the U.S. will tax the U.S. partner’s distributive share of the partnership income. Partnership income “flows through” to the shareholders of the partnership and they are taxed on their share of the income. For example, if a U.S. person owns an 25% interest in a foreign partnership, then the U.S. person will need to file Form 8865 and also report 25% of the partnership’s net income on his personal return. Depending on the structure of the partnership and the U.S. partner’s “active” involvement with the partnership, the U.S. partner may be subject to self-employment tax on this income, in addition to income tax.
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.
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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.