The U.S. persons include U.S. citizens and residents e.g., “green card” holders or those who meet the substantial presence test”) as well as U.S. entities (e.g., U.S. partnerships, corporations, and trusts). The term “foreign” Business means a business entity that is not domestic. In other words, the business was not registered in a U.S. state or District of Columbia. Depending on the type of foreign business that is being conducted, there are different applicable reporting requirements for US tax purposes.

Key Takeaways

 

 

Required Information*	Category of Filer
	1 Shareholders of SFCs: U.S. shareholders owning at least 10% of the total combined voting power of all classes of stock in aspecified foreign corporation  (SFC). SFCs include (1) controlled foreign corporations (CFC),  , and (2) any foreign corporation with one or more 10 percent domestic corporation shareholders.			2 A U.S. officer or director is a Category 2 filer when a U.S. person (not necessarily the filer) acquires a 10% stock interest or an additional 10% stock interest in a foreign corporation.	3 U.S. persons who either acquire 10% or more of the stock of a foreign corporation or acquire stock that, without regard to stock already owned on the date of the acquisition, meet the 10% stock ownership requirements with respect to the foreign corporation. Category 3 filers also include: (1) U.S. shareholders of captive foreign insurance companies ; (2) Foreign 10% shareholders who become U.S. persons, such as a nonresident alien becoming a U.S. resident; or (3)U.S. persons who dispose of sufficient stock in the foreign corporation to reduce their ownership interest to less than 10%.	4 any U.S. person who controls a foreign corporation for at least 30 days during the taxable year.	5 a U.S. Shareholder of a Controlled Foreign Corporation (“CFC”) for 30 days or more during the year and who owns stock on the last day of the year
	1a US shareholder of an SFC is a related party, considering both direct and indirect ownership	1b an unrelated U.S. Shareholder of an SFC	1c U.S. Shareholder of a foreign corporation that is related only via constructive ownership.				5a a U.S. Shareholder is related to FORco,18 under either direct or indirect ownership	5b the U.S. Shareholder does not directly or indirectly own more than 50% and the U.S. Shareholder is unrelated	5c A U.S. Shareholder that is a related corporation via constructive ownership
The identifying information on page 1 of Form 5471	✓	✓	✓	✓	✓	✓	✓	✓	✓
Schedule A					✓	✓
Schedule B, Part I					✓	✓
Schedule B, Part II	✓		✓		✓	✓	✓		✓
Schedules C (Income Statement )and F (Balance Sheet)					✓	✓
Separate Schedule E(computation of Foreign Income Taxes)	✓	✓	✓			✓	✓	✓	✓
Schedule E-1 (included with separate Schedule E)	✓	✓1				✓	✓	✓
Schedule G (other information)			✓		✓	✓	✓		✓
Separate Schedule G-1			✓		✓	✓	✓		✓
Separate Schedule H (Current Earnings and Profits)						✓	✓
Schedule I (Subpart F Income)						✓	✓	✓
Separate Schedule I-1 (Global Intangible Low-Taxed Income)						✓	✓	✓	✓
Separate Schedule J (Accumulated Earnings and Profits)	✓					✓	✓
Separate Schedule M(Intercompany Transactions)						✓
Separate Schedule O, Part I				✓
Separate Schedule O, Part II					✓
Separate Schedule P (Previously-Taxed Earnings and Profits)	✓	✓				✓	✓	✓
Separate Schedule Q						✓	✓	✓
Separate Schedule R						✓	✓

Form 926

As an additional key reporting requirement for a US person involved with a foreign corporation, a US person who transfers certain property to a foreign corporation is required to file Form 926, “Return by a U.S. Transferor of Property to a Foreign Corporation.”  Transfers of cash to a foreign corporation that result in a US person holding, directly or indirectly, at least 10% of the stock of the corporation or that aggregate more than $100,000 over a 12-month period are examples of property transfers that can require the filing of Form 926.

Foreign Partnerships

If a US person is involved with a foreign partnership, a key reporting requirement is Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships.”

Form 8865 requires detailed and comprehensive information, similar to that needed for U.S. partnership Form 1065 and foreign corporation Form 5471. they includes

1. Income and financial statements of the partnership

• Profit and Loss Statement: This includes reporting the partnership’s total income, expenses, and net profit or loss for the fiscal year.
• Balance Sheet: Details of the partnership’s assets, liabilities, and partners’ equity at the beginning and end of the tax year.
• Statement of Cash Flows: Although not always mandatory, this can provide additional insight into the financial health and operations of the partnership.

2. Details of transactions between the partner and the partnership

• Contributions and Distributions: Reporting any capital contributions made by the partners and distributions received, including non-cash transactions.
• Intercompany Transactions: Details of any transactions between the partnership and its partners, such as loans, rental agreements, or service contracts.
• Transfer Pricing Information: If applicable, information on transactions between related entities within the partnership to ensure they are conducted at arm’s length.

3. Information about the partners and their share in the partnership’s income

• Partner Identification: Names, addresses, and Tax Identification Numbers (TINs) of all partners.
• Ownership Percentage: The share of each partner in the partnership, including any changes in ownership during the tax year.
• Allocations of Income, Deductions, and Credits: Detailed breakdown of how the partnership’s income, deductions, and credits are allocated among the partners, based on their respective ownership interests.
• Capital Account Analysis: A reconciliation of each partner’s capital account from the beginning to the end of the tax year, including any adjustments for contributions, distributions, and allocable share of income or loss.

There are generally four categories of US persons who are required to file Form 8865. Each category has distinct filing obligations, and understanding these is key to ensuring compliance and avoiding penalties.

• U.S. persons who control more than a 50% interest in a foreign partnership.  Control is determined by direct or indirect ownership of more than 50% of the partnership’s capital interest, profits interest, or voting power. These filers must report all the activities of the foreign partnership, including income, deductions, losses, and credits. They also need to provide a complete set of financial statements for the partnership.
• A US person who owns a 10% or greater interest in a foreign partnership while the partnership was “controlled” (as described above) by US persons, each owning at least a 10% interest; These filers must report their share of the foreign partnership’s income, deductions, and credits. They also need to disclose changes in their partnership interest during the tax year.
• A US person who contributes property to a foreign partnership in exchange for an interest in such partnership, if either (a) the US citizen owns directly or constructively at least a 10% interest in the partnership immediately after the contribution, or (b) the value of such contributed property (when added to the value of any other property contributed to the partnership by the US citizen) exceeds $100,000 over a 12-month period; These filers must report the details of the property contributed, its fair market value, and any gain recognized due to the transfer.
• A US person who has a reportable event under Internal Revenue Code Section 6046A (certain acquisitions, dispositions, and changes in proportional interests with respect to a foreign partnership). These filers must provide comprehensive details of the reportable event, including the nature of the transaction, dates, and financial amounts involved.

Form 8865 is filed with the US citizen’s income tax return.

Schedule K-2 and K-3 for International Partnership Tax Reporting

If you’re a partner in an international partnership, you need to be aware of Schedule K-2 and K-3 forms. These forms are essential for accurately reporting international partnership tax information, especially foreign income, on K-1s.
The IRS introduced Schedule K-2 and K-3 in 2021 as part of their efforts to improve foreign income reporting on K-1s. All partnerships reported on Form 8865 are considered foreign and have foreign income on the K-1 by default. Therefore, every time you file Form 8865, you must include Schedule K-2 and K-3.

• Schedule K-2 reports international tax information relevant to a partnership’s operations, such as foreign taxes paid, income from foreign sources, and other deductions or credits related to foreign activities.
• Schedule K-3, on the other hand, is used to report partners’ shares of the items reported on Schedule K-2. Partners must also include the information reported on Schedule K-3 on their tax or information returns, if applicable.

Failing to include Schedule K-2 and K-3 with Form 8865 can result in penalties and fines. Therefore, it’s crucial to understand and comply with these requirements to avoid any issues with the IRS.

Foreign Limited Liability Companies

Form 8832

Under Form 8832, “Entity Classification Election”, a foreign limited liability company can elect to be classified as:

• An association taxable as a corporation;

• A partnership; or
• A disregarded entity, generally requires a single owner of the foreign limited liability company.

If electing to be classified as an association taxable as a corporation, the foreign limited liability company will be subject to foreign corporation reporting requirements (including Form 5471 and Form 926 as described above).  If electing to be classified as a partnership, the foreign limited liability company will be subject to foreign partnership reporting requirements (including Form 8865 as described above).

But, If electing to be classified as a disregarded entity, the foreign limited liability company does not file a separate tax return; instead, the tax attributes of the limited liability company flow through to the US income tax return of the single owner of such limited liability company.

Form 8858

A US person who is the single owner of a foreign “disregarded entity” generally is required to file Form 8858, “Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs). An FDE can be owned by an individual, corporation, trust, or other entity.

U.S. persons that operate a foreign branch, own a foreign disregarded entity, or have specified interests in tax owners of FBs or FDEs must file Form 8858.

There are six (6) categories for Form 8858 filers:

Category 1 Filer. U.S. persons who own or operate a foreign disregarded entity or foreign branch at any time during their tax year or annual accounting period.

Category 2 Filer. U.S. persons who are directly (or indirectly through a tier of FDEs) the tax owners of a foreign disregarded entity or the operator of a foreign branch.

Category 3 Filer. Certain U.S. persons that are required to file Form 5471 at any point during the CFC’s annual accounting period with respect to a CFC that runs a foreign branch or is the tax owner of a foreign disregarded entity.

Category 4 Filer. Certain U.S. persons that are required to file Form 8865 with respect to a CFP that is the tax owner of an FDE or manages an FB at any time during the CFP’s annual accounting period.

Category 5 Filer. U.S. persons that are partners in a partnership that owns an FDE or operates an FB and apply Section 987 to the activities of the FDE or FB using a method that requires the partners, rather than the partnership, to recognize Section 987 gain or loss with respect to the FDE or FB.

Category 6 Filer. A U.S. corporation (other than an RIC, an REIT, or an S corporation) that is a partner in a U.S. partnership, which checked box 11 (Dual Consolidated Loss) on Schedules K-2 and K-3 (Form 1065).

For tax purposes, the IRS distinguishes between the tax owner and the direct owner of the FDE.

• Tax owner. You are a tax owner if you own the FDE assets & liabilities for the tax purpose.
• Direct owner. A direct owner is the legal owner of the FDE.

All applicable schedules must be filled out with timely information, and all supporting documents must be kept for audit purposes. Some of the schedules that need to be completed are the following:

1. Schedule C (Form 8858): Reports the summary income statement of the foreign disregarded entity or foreign branch
2. Schedule C-1 (Form 8858): Reports gains or losses from foreign currency exchange (Section 987)
3. Schedule F (Form 8858): Reports the summary balance sheet of the FDE of FB
4. Schedule G (Form 8858): Other information, including gross receipts derived from sales of intangible property to the foreign corporation, that the filer included in its computation of FDDEI and whether the foreign corporation owns or has an interest in any foreign partnership, trust, or other disregarded entities.
5. Schedule H6 (Form 8858): The FDE or FB’s earnings and profits in its functional currency.
6. Schedule I (Form 8858): Only required if a US corporation owns the FDE.
7. Schedule J8 (Form 8858): Foreign tax credit
8. Schedule M: (Form 8858) Transactions Between Foreign Disregarded Entity (FDE) or Foreign Branch (FB) and the Filer or Other Related Entities

Foreign Trusts

Form 3520

If a US person is involved with a foreign trust, a key reporting requirement is Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.”

A US citizen generally is required to file Form 3520 when:

• A US person is the grantor of a foreign inter vivos trust that is created;
• A US person transfers money or property, directly or indirectly, to a foreign trust; and
• A US person is treated as the owner of any part of the assets of a foreign trust under Internal Revenue Code Sections 671 through 679 (the “grantor trust” rules).

Form 3520 is due on the 15th day of the fourth month following the end of the US citizen’s tax year.

Form 3520-A

As an additional key reporting requirement for a foreign trust, a foreign trust with a US person (including a US citizen) that is an owner of any portion of the foreign trust under the “grantor trust” rules is required to file Form 3520-A, “Annual Information Return of Foreign Trust With a U.S. Owner.”  While Form 3520-A is filed by a foreign trust, the US person (including US citizen) “owner” of the foreign trust is responsible for ensuring that the foreign trust files Form 3520-A.

Form 3520-A is due by the 15th day of the third month following the end of the foreign trust’s tax year.

FBAR

While, as described above, there are different reporting requirements for foreign corporations, foreign partnerships, foreign limited liability companies, and foreign trusts, there is one reporting requirement applicable to each of these entities – Report of Foreign Bank and Financial Accounts(FBAR) .

A US citizen must file an FBAR form to report a financial interest in or signature or other authority over at least one financial account located outside the United States if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported. Thus, a US citizen who has a signature or other authority over at least one foreign financial account of a foreign corporation, foreign partnership, foreign limited liability company, or foreign trust with an aggregate value of more than $10,000 is required to file an FBAR form.

The FBAR form (also known as FinCEN Form 114) is due on April 15 (with an automatic extension to October 15) for the prior calendar year.

Know Your Form of Business Entity

The terms “foreign corporation,” “foreign partnership,” “foreign limited liability company,” and “foreign trust” used above are all US terms. Many foreign countries use their own language and terminology to define business entities in their countries. It is important for a US citizen with a foreign business to know how the Internal Revenue Service classifies such business.

For example, on Form 8832, certain foreign entities are classified as corporations for US tax purposes. These include a Public Limited Company in Australia, a Sociedade Anonima in Brazil, an Aktiengesellschaft in Germany, a Kabushiki Kaisha in Japan, and an Anonim Sirket in Turkey.

Penalties

Failure to file any of the reporting forms described above is not a minor matter. A US citizen can be subject to significant penalties if these reporting forms are not filed in a timely manner.

Penalties – Form 5471, Form 8865, and Form 8858

Failure to timely file Form 5471, Form 8865, orForm 8858  can subject a US citizen to civil penalties of at least $10,000 and loss of 10% of foreign tax credits, as well as criminal penalties.

Penalties – Form 926

For failure to file Form 926 in a timely manner, a US citizen can be subject to a civil penalty equal to 10% of the fair market value of the subject transferred property at the time of transfer.

Penalties – Form 3520

If Form 3520 is not timely filed, a US citizen can be subject to a civil penalty generally equal to at least the greater of $10,000, 35% of the gross value of any property transferred to the foreign trust, 35% of the gross value of any distributions received from a foreign trust, or 5% of the gross value of the portion of the foreign trust’s assets treated as owned by the US citizen under the “grantor trust” rules.

Penalties – Form 3520-A

If Form 3520-A is not timely filed, a US citizen can be subject to a civil penalty equal to at least the greater of $10,000 or 5% of the gross value of the portion of the foreign trust’s assets treated as owned by the US citizen under the “grantor trust” rules.

Penalties – FBAR

Failure to timely file an FBAR form can subject a US citizen to (i) a “non-willful” failure, civil penalties of at least $14,489 (to be adjusted annually for inflation), and (ii) for a “willful” failure, civil penalties of at least the greater of $144,886 (to be adjusted annually for inflation) or 50% of the balance in the foreign financial account and criminal penalties.