Do U.S. Entrepreneurs Need to Declare a Business Registered Abroad
With the international digital nomad lifestyle more popular than ever, there’s never been a better time for American entrepreneurs to live or travel abroad while running their business remotely.
While there may be benefits to registering a business overseas, it may also trigger additional (or certainly different, at least) reporting requirements in the United States. This applies both to entrepreneurs who are digital nomads and to the millions of Americans who live abroad permanently.
Since the US tax system is based on citizenship rather than residency, wherever you move or travel in the world, as an American you must always file a US federal tax return each year, including reporting your worldwide income and business interests.
In this article, we’ll look at US filing requirements for Americans with a business registered overseas and how they vary by business type.
Americans with an interest in a corporation registered overseas may have to file Form 5471 as part of their annual US tax return. Form 5471 is a long and complex form that includes many schedules and in many cases can trigger income tax on the individual tax return. If you need to complete Form 5471, it is worth seeking the assistance of an experienced expat tax professional.
What does “having an interest” in a foreign company mean? Here are some of the common scenarios that might require a Form 5471:
• You acquire or dispose of at least 10% of a foreign company.
• You are an officer or director of a foreign company and a US person acquires a 10% equity interest.
• You control a foreign company, which generally means that you own more than 50% of the voting shares.
• You and your non-US spouse together own more than 50% of a foreign corporation, even if your direct ownership is less than 50%.
• You hold shares (more than 10%) in a controlled foreign company (CFC), ie most often a foreign company controlled by Americans.
If you’re not sure whether to complete Form 5471, ask an expat tax professional.
In addition to individuals, U.S. corporations, partnerships, and trusts may need to file Form 5471 if they meet the criteria for owning or controlling foreign corporations.
Since the 2017 tax reform, owning a foreign company can also mean having to pay US tax on the profits of a foreign company if it has not already been taxed abroad. The foreign corporate income tax is known as GILTI (low-taxed intangible worldwide income), and the corresponding income is reported on Form 8992. Business owners in countries that tax corporate income at effective rates of at least 90% of corporate tax rates in the United States are, however, exempt from GILTI.
SARL REGISTERED ABROAD
US-based LLCs are treated by default as disregard entities for US tax purposes, meaning their income is reported on their owners’ tax returns. When an LLC is treated as an ignored entity, it simplifies reporting.
However, foreign-registered LLCs owned by U.S. taxpayers are not treated as bypassed by default and therefore may require complex disclosures such as Form 5471.
To treat a foreign-registered LLC as a disregarded entity, you must first obtain a U.S. Employer Identification Number (EIN). Then Form 8832 can be submitted to elect to treat the LLC as ignored. Once the entity has been properly established as disregarded, Form 8858 must be filed annually with the IRS. It’s much simpler than Form 5471.
The decision to disregard a US-owned foreign entity must be carefully planned and considered to achieve the most tax-advantageous position possible. An expatriate CPA or international tax lawyer can help you with this planning process, although the rapid evolution of tax laws related to foreign corporations in recent years continues to make long-term planning increasingly difficult.
Americans whose foreign business is a partnership registered outside the United States may be required to disclose it on Form 8865. This is the case if:
• You hold a controlling interest (ie more than 50%) in the partnership.
• You acquired, sold or changed your interest in a foreign partnership during a year.
• No one has a 10% interest in a partnership controlled by US persons.
The information reported on Form 8865 is similar to that of registered partnerships in the United States, including details of the partners, their ownership and amount of investment, as well as a balance sheet and profit and loss account.
FOREIGN ACCOUNT DECLARATION FOR FOREIGN COMPANIES
Americans or U.S.-controlled entities such as corporations, partnerships, and trusts, that have foreign registered financial accounts, may be required to file a Foreign Bank Account Report (FBAR), also known as a Form 114, on FinCEN. BSA Electronic Filing System.
The rules state that if a U.S. person or entity has a total of more than $10,000 in foreign financial accounts over which they have signing authority, then they must report all of their foreign accounts on an FBAR.
Accounts include bank and investment accounts, as well as individual retirement accounts.
Almost all foreign financial institutions also report the balance and contact information of their US account holders to the US government. It is therefore an important reporting requirement, although separate from the tax return.
GET ADVICE BEFORE REGISTERING A COMPANY ABROAD
Registering a business overseas is a big decision that has important ramifications. Tax planning and reporting should always be a key consideration when considering registering a business overseas. An expat tax specialist can look at your goals and situation holistically before advising you on the best course of action.
The information provided here is not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.
Katelynn Minott, CPA is the CEO of Bright!Tax Tax services for expatsAmerica’s award-winning tax services provider for Americans living abroad.