Are you a resident of the US doing business in other countries? Or perhaps your company has expanded to other countries. While that business is taking place outside our borders, you need to ensure you are complying with the applicable Internal Revenue Service’s (IRS) filing requirements.
There are specific filing requirements US residents should be aware when doing business outside the United States. Outbound international refers to a US-person (individual or entity) with activity outside the US. It is important to understand what the filing obligations are as failure to report income, activities, and investments can lead to extensive penalties. The information below outlines common outbound international filing requirements.
Form 8832 – Entity Classification Election
If you are considering expanding your business outside the United States, the first decision you need to make is entity classification. The IRS has certain default regulations which help determine how an entity will be classified for US tax purposes. Entity classifications include corporation, partnership, or disregarded as separate from its owner. Certain entities can elect to be treated as an entity other than the one to which it defaults. Form 8832 is used to elect entity classification. The election cannot take effect more than 75 days before the filing date, and only certain foreign entities are eligible to make the election. Review of the default regulations should be completed to ensure a classification election is allowed before filing. Elections made on pre-existing entities may result in a taxable transaction.
Form 926 – Return by a US Transferor of Property to a Foreign Corporation
US persons, domestic corporations, or domestic estates or trusts must file Form 926 to report certain transfers of US property to a foreign corporation, including capital contributions, tangible property, and intangible property. A penalty equaling 10 percent of the fair market value of the property at the time of the exchange/transfer may be imposed for failure to file. If tangible or intangible property has been transferred, an analysis should be completed to determine whether the transaction results in taxable gain.
Form 8833 – Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)
The US has treaties in place with a number of foreign countries. Negotiated treaties may tax certain items differently than the IRS regulations. In certain instances, taxpayers claiming the benefit of a treaty may be required to file Form 8833 – Treaty-Based Return Position Disclosure. Taxpayers required to file Form 8833 that do not are subject to a penalty of $1,000 for each failure. There are some exceptions in which the taxpayer does not have to file Form 8833. These exceptions can be found at: .
Form 5471 – Information Return of US Persons with Respect to Certain Foreign Corporations
A foreign entity treated as Corporation for US tax purposes may be required to file Form 5471. Generally speaking, Form 5471 is required to be filed in the following situations:
- US person becomes a director or officer of a foreign corporation
- US person acquires an ownership interest in a foreign corporation in excess of prescribed limits
- US person disposes of stock in a foreign corporation that reduces his or her interest in the foreign corporation to less than the prescribed limits
- US person is in control of a foreign corporation for an uninterrupted period of at least 30 days in a year
- US person is a 10 percent or more shareholder in a foreign corporation that is a ‘controlled foreign corporation’ for an uninterrupted period of at least 30 days in a year and that person owns that stock on the last day of the year
Determination of ownership interest must include analysis of direct, indirect, and constructive ownership. One cannot merely look at the direct ownership of the entity when making a determination of whether there is a filing requirement.
Form 8865 – Return of US Persons with Respect to Certain Foreign Partnerships
Form 8865 is used to report the information required with respect to certain foreign partnerships. The form is required in similar situations for certain foreign corporation as discussed above. Form 8865 is similar in nature to Form 1065. US taxpayers of a foreign partnership with a Form 8865 filing requirement will receive a K-1 and are required to report activity from that K-1 on their US income tax return.
Form 8858 – Information Return of US Persons With Respect to Foreign Disregarded Entities
Form 8858 is required to be filed if a US person owns 100 percent of a foreign entity that is treated as a disregarded entity for US tax purposes. This form may also be required if the taxpayer is required to file Form 5471 or Form 8865 and controlled foreign corporation or foreign partnership owns a foreign disregarded entity.
The IRS currently assesses automatic failure to file and late filing penalties of $10,000 for Forms 5471, 8865, and 8858.
FinCEN 114 – Report of Foreign Bank and Financial Accounts
[This form was formerly known as TD F 90-22.1] Each US person who has a financial interest in or signature or other authority over any foreign financial accounts in a foreign country must complete Form FinCEN Form 114 if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. A foreign financial account is a financial account located outside the United States. For example, an account maintained with a branch of a United States bank that is physically located outside the United States is a foreign financial account. An account maintained with a branch of a foreign bank that is physically located in the United States is not a foreign financial account.
A financial account includes, but is not limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution. A financial account also includes a commodity futures or options account, an insurance policy with a cash value, an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund.
Form 3520-A – Annual Information Return of Foreign Trust with a US Owner
Any foreign trust with at least one US owner must file Form 3520-A.
Form 5713 – International Boycott Report
Form 5713 is used to annually report transactions with, and activities in, certain countries that are listed by the Secretary as participating in foreign boycotts. Boycotted countries include: Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Aram Emirates, and the Republic of Yemen.
The forms listed above provide a brief summary of the most common forms required for US individuals and entities doing business outside of the US. There are additional forms that may apply. Navigating the rules and regulations surrounding this filing requirements can be quite complex. When doing business in other countries, it is recommended you speak with a US tax advisor to ensure you are meeting all filing obligations to avoid potential penalties and taking advantage of tax treaty benefits.