7 Common Foreign Entity Types and U.S. Tax Implications

7 Common Foreign Entity Types and U.S. Tax Implications

Common Foreign Entity Types and U.S. Tax Implications

Whether a person is a U.S. Citizen, a Lawful Permanent Resident, or a Foreign National subject to U.S. tax because they met the Substantial Presence Test, U.S. taxpayers across the globe may have a very diverse portfolio that may include ownership or interest in a foreign entity. The extent of ownership the U.S. person has over the foreign entity will determine what type of tax and reporting may be required from a U.S. tax perspective. There are various twists and turns to consider when determining whether a foreign entity must be reported on a U.S. tax return, if any additional international information returns are required, and whether or not the taxpayer has the option to disregard the entity and/or if not if the company is subject to issues such as GILTI, Subpart F and IRC 965. Let’s look at seven (7) common foreign entity types as well as three (3) common tax issues involving these foreign entities.

Canadian Corporation (Per Se Corporation)

Many taxpayers who are considered US persons for tax purposes and are from Canada may have a Canadian corporation for several reasons. They may maintain the Canadian corporation to protect investments, or it may be used for active purposes such as consulting or operating a small business. It is important to note, that the Canadian corporation is a per se corporation, which means that unlike other types of corporations on this list, taxpayers do not have the opportunity to disregard the Canadian Corporation entity.

Australia PTY Ltd

Another common type of entity is the PTY Ltd in Australia. The U.S. tax and reporting of this type of entity varies from the relatively straightforward to the complex, depending on the purpose of the PTY Ltd. For example, it may be used as the entity structure for a small business, which may be more straightforward reporting — or it may be used for purposes of a self-managed superannuation fund, which may get more complicated (for U.S. tax purposes). It is not a per se corporation which means under the proper circumstances the taxpayer may consider disregarding the entity. A PTY Ltd. may be deemed a CFC and/or may require Form 5471.

UK Ltd

Many of our clients located in the United Kingdom operate by way of a UK limited company, which similar in concept to an LLC in the United States. But, while these companies may be somewhat similar in concept, they are typically taxed differently. Notably is the fact that — similar to Australia — the UK is on a different tax year for personal tax filings, so it is important to note the differences when reporting for tax purposes in the United States. A UK Ltd may be deemed a CFC and/or may require Form 5471.

Hong Kong Private Limited

Oftentimes, taxpayers who are U.S. persons but operate in Hong Kong owning investments and other types of assets may own those companies through Hong Kong Private Limited – and sometimes by way of a BVI company. Depending on whether a Hong Kong Private Limited is a controlled foreign corporation would determine the extent of the reporting required. Since this type of structure is oftentimes created to hold passive types of assets, there is also a common concern about whether the foreign LLC is operating as a PFIC as well.

Sociedad Anonima (Per Se Corporation)

The Sociedad Anonima is a common structure found in different countries for both business purposes and estate tax purposes. U.S. persons who have investments in countries in Latin America may utilize the society underline to try to protect their assets and/or for estate tax purposes. Similar to the Canadian corporation, this type of structure is a per se corporation, which means taxpayers cannot disregard the entity. And, since oftentimes it is owned by one or two US persons with minor ownership by locals, it falls into CFC territory.

Belize Corporation

For taxpayers who own investments in Belize, oftentimes they will operate through a Belize company. The same type of rules apply as mentioned above in that if the taxpayer does not disregard the entity (presuming it is not a public corporation), then there may be various tax and reporting issues such as Subpart F income and Form 5471 reporting.

BVI Company

Unlike some of the other types of entities identified above, the BVI Company is not a per se corporation. Therefore, taxpayers who own and operate these types of companies, oftentimes in conjunction with a Hong Kong Private Limited or offshore asset protection trust – may have the opportunity to disregard the entity although for income tax purposes that may not always be the best strategy.

Different Tax and Reporting Strategies to Consider

When a US person has ownership of a foreign company there are a few common issues to consider before taking any strategies or making any representations to the IRS about the foreign company.

CFC or Not

If the company is a CFC or ‘Controlled Foreign Corporation’ then there are various issues they may have to contend with such as subpart F and GILTI. In addition, taxpayers may have to file a Form 5471 and several different additional schedules depending on the ownership of the foreign company — especially if it is a controlled foreign corporation (which requires extensive reporting). Form 5471 is a grueling form, so taxpayers should consider the pros and cons of disregarding the entity before getting on the Form 5471 bandwagon.

Disregard or Not

While disregarding the entity may be thought of as significantly reducing the reporting requirements, it is important to note that other issues happen when a person disregards the entity. That is because when a foreign entity is disregarded, that means that all the income generated from that company will be taxed to the U.S. person and included on their personal tax return. Depending on the different tax rates the taxpayer may have, along with what taxes were paid at the corporate level overseas can impact whether disregarding the entity overall is the best strategy to take.

Per Se or Not

Finally, it is also important for taxpayers to consider whether they are the owner of a per se corporation. The IRS has identified several entities that are considered per se corporations. If a company is considered a per se entity, then that means the Taxpayer does not have the opportunity to disregard the entity for U.S. tax purposes even if that is what they are seeking to do.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.