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1. Foreign entity reporting
Depending on the type of entity (trust, partnership, corporation, LLC) and the ownership percentage of the U.S. individual, an information filing may be required. For example, Form 5471 must be filed by an individual who owns a certain percentage of stock in a foreign corporation. At times, just being an officer or director without holding a large percentage of stock can trigger this filing requirement so it’s important to inform your tax advisor who specializes in international accounting of all facts and circumstances with regards to foreign companies.
2. Foreign entity treatment does not always equal U.S. entity treatment
There are specific rules out there for certain types of entities in each country. An LLC may be classified as a pass-through entity in the foreign country where it was formed but could be a corporation for US tax purposes. Likewise, some entities can file a special election in the U.S. to choose what type of entity to be treated as depending on the number of members or other qualifications. It’s important to note the type of entity that was set up overseas, the facts associated with its existence, as well as the filing of any elections with the IRS. An international tax CPA can help determine the best treatment for your specific situation.
3. Foreign Bank Account Reporting (FBAR)
U.S. account holders with a financial interest in or signature authority over 1 or more foreign financial accounts with an aggregate value of $10,000 or more during the year must file the FBAR. Foreign financial accounts include accounts in which an indirect interest of more than 50% is held through a foreign company. Since it’s likely that your foreign company has foreign bank accounts, you would need to report these on the FBAR form.
4. Foreign asset reporting
U.S. taxpayers must report their “specified foreign financials assets” to the IRS if they meet certain asset-value thresholds according to their filing status. This includes the value invested in foreign entities (ex. total equity in a foreign corporation), foreign partnership interests, and foreign accounts and foreign non-account investments assets held in foreign trusts.
5. IRS Penalties
Penalties associated with non-compliance are steep, starting at $10,000 for non-willful behavior and increasing into the hundreds of thousands for willful failure to file.
At Kaufman Accounting, our expertise is in international tax services. If you are a US Citizen with interest in a Foreign company, contact us today to see how we can help!
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