A Form 1120-F Foreign Business with US Income Tax Overview

A Form 1120-F Foreign Business with US Income Tax

A Form 1120-F Foreign Business with US Income Tax

When a foreign entity conducts business in the United States and has income that is Effectively Connected Income (ECI), they may have to file Form 1120-F in order to meet the requirements under US tax law (usually in conjunction with a Form 5472).  Even if a corporation that is considered a foreign corporation (and operates in the US) does not have any tax implication — they may still file a protective form 1120-F especially then may need to claim a refund at a future date (aka Protective Filing). The form 11/28 is highly complicated, so we will go through some of the basics to give you an idea of what you need to know and whether you need to file the form or not.

Purpose of Form 1120-F

As provided by the IRS:

• • • Use Form 1120-F to report the income, gains, losses, deductions, credits, and to figure the U.S. income tax liability of a foreign corporation. Also, use Form 1120-F to claim any refund that is due to transmit Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), or to calculate and pay a foreign corporation’s branch profits tax liability and tax on excess interest, if any, under section 884.

Who Must File Form 1120-F?

There are many different categories of foreign corporations that may have to file the form — although are various exceptions, exclusions, and limitations for filing.

From a baseline perspective the IRS provides the following as to who must file:

• • • Unless one of the exceptions under Exceptions From Filing below applies or a special return is required (see Special Returns for Certain Organizations, later), a foreign corporation must file Form 1120-F if, during the tax year, the corporation:

      • Was engaged in a trade or business in the United States, whether or not it had U.S. source income from that trade or business, and whether or not income from such trade or business is exempt from U.S. tax under a tax treaty (see also Protective Return Filers, later);

        • Had income, gains, or losses treated as if they were effectively connected with the conduct of a U.S. trade or business (see Section II, later); or 

        • Was not engaged in a trade or business in the United States, but had income from any U.S. source, if its tax liability has not been fully satisfied by the withholding of tax at source under Chapter 3 of the Code.

      • Was, or had a branch that was, a qualified derivatives dealer (QDD)

The key categories of filers include those who are engaged in the US trade or business; those that had gains or losses or other income connected with the conduct of a US trade or business, and/or otherwise had US sourced income – even if not in a trade or business.

When is a Protective Return Warranted?

As provided by the IRS:

• • • If a foreign corporation conducts limited activities in the United States in a tax year that the foreign corporation determines does not give rise to gross income that is effectively connected with the conduct of a trade or business within the United States, the foreign corporation should follow the instructions for filing a protective return to safeguard its right to receive the benefit of the deductions and credits attributable to that gross income under Regulations section 1.882-4(a)(3)(vi) in the event that it is subsequently determined that the original determination was incorrect.

    • A foreign corporation should also file a protective return if it determines initially that it has no U.S. tax liability under the provisions of an applicable income tax treaty (for example, because its income is not attributable to a permanent establishment in the United States). See Protective Return Filers, later. A foreign corporation that does not file a return will lose the right to take deductions and credits against effectively connected income (ECI). See Other Filing Requirements, later.

Exceptions from Filing IRS Form 1120-F

As provided by the IRS:

• • • A foreign corporation does not have to file Form 1120-F if neither the foreign corporation nor any of its branches was a QDD and any of the following apply. 

      • It did not engage in a U.S. trade or business during the year, and its full U.S. tax was withheld at source.

      • Its only U.S. source income is exempt from U.S. taxation under section 881(c) or (d). • It is a beneficiary of an estate or trust engaged in a U.S. trade or business, but would itself otherwise not need to file.

When to File Form 1120-F ?

As provided by the IRS: 

Foreign Corporation With an Office or Place of Business in the United States

• • • A foreign corporation that maintains an office or place of business in the United States must generally file Form 1120-F by the 15th day of the 4th month after the end of its tax year. A new corporation filing a short-period return must generally file by the 15th day of the 4th month after the short period ends. A corporation that has dissolved must generally file by the 15th day of the 4th month after the date it dissolved. However, a corporation with a fiscal tax year ending June 30 must file by the 15th day of the 3rd month after the end of its tax year.

    • A corporation with a short tax year ending anytime in June will be treated as if the short year ended on June 30, and must file by the 15th day of the 3rd month after the end of its tax year. Extension of time to file. The corporation must file Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, by the return due date specified in the previous two paragraphs to request an extension of time to file. However, there is an exception that applies under Regulations section 1.6081-5. See the Instructions for

Foreign Corporation With No Office or Place of Business in the United States

• • • A foreign corporation that does not maintain an office or place of business in the United States must generally file Form 1120-F by the 15th day of the 6th month after the end of its tax year. Extension of time to file. File Form 7004 by the 15th day of the 6th month after the end of the tax year to request an extension of time to file. See the Instructions for Form 7004 for additional information

Form 5472

As provided by the IRS:

• • • Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. This form is filed by or for a foreign corporation engaged in a U.S. trade or business that had certain reportable transactions with a related party. See the Instructions for Form 5472 for filing instructions and information for failure to file and maintain records.

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