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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 can be advantages to registering a business overseas, doing so can also trigger additional (or certainly different, at least) U.S. reporting requirements. This is equally true for entrepreneurs who are digital nomads as it is for the millions of Americans who live abroad permanently.
Because the U.S. tax system is citizenship-based rather than residence-based, wherever in the world you relocate to or travel, as an American, you still have to file a U.S. federal tax return every year, including reporting your global income and business interests.
In this article, we’ll look at U.S. reporting requirements for Americans with a foreign-registered business, and investigate how they vary depending on the type of business.
Americans with an interest in a corporation registered abroad may have to file Form 5471 as part of their annual U.S. tax return. Form 5471 is a long and complex form that includes numerous schedules, and in many cases it can trigger income tax on the individual tax return. If you do have to file Form 5471, it is worth seeking assistance from an experienced expat tax professional.
What does “with an interest” in a foreign corporation 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 corporation.
• You are an officer or director of a foreign corporation and a U.S. person acquires a 10% stock interest.
• You control a foreign corporation, typically meaning you hold more than 50% of voting shares.
• You and your non-U.S. spouse together own more than 50% of a foreign corporation, even if your direct ownership is less than 50%.
• You have shares (more than 10%) in a controlled foreign corporation (CFC), which most often means a foreign corporation that is controlled by Americans.
If you aren’t sure whether you need to file Form 5471, ask an expat tax professional.
As well as individuals, American companies, partnerships, and trusts may have to file Form 5471 if they meet the criteria relating to owning or controlling foreign corporations.
Since the 2017 tax reform, owning a foreign corporation can also mean having to pay U.S. tax on a foreign corporation’s earnings if they haven’t been taxed abroad already. The tax on foreign corporate earnings is known as GILTI (global intangible low taxed income), and the related income is reported on Form 8992. Business owners in countries that tax corporate income at effective rates of at least 90% of U.S. corporate tax rates are exempt from GILTI, however.
U.S.-based LLCs are by default treated as disregarded entities for U.S. tax purposes, meaning their income is reported on their owners’ tax return. When an LLC is treated as a disregarded entity, it makes reporting it simpler.
Foreign-registered LLCs owned by U.S. taxpayers, however, are not by default treated as disregarded, and so may require complex disclosures such as Form 5471.
To treat a foreign-registered LLC as a disregarded entity, you first have to obtain a U.S. Employer ID Number (EIN). Then, Form 8832 can be submitted to elect to treat the LLC as disregarded. Once the entity has been properly established as disregarded, Form 8858 must be filed annually with the IRS. It is much simpler than Form 5471.
The decision to disregard an American-owned foreign entity is one that should be carefully planned and considered to achieve the most tax-efficient position possible. An expat CPA or international tax attorney can support you in this planning process, though rapidly changing tax legislation related to foreign companies in the past few years continues to make long-term planning more and more challenging.
Americans whose foreign business is a partnership registered outside the U.S. may have to disclose it on Form 8865. This is the case if:
• You have a controlling (i.e., more than 50%) interest in the partnership.
• You acquired, disposed of, or changed your interest in a foreign partnership in a year.
• No one has a 10% interest in a partnership controlled by U.S. persons.
The information reported on Form 8865 is similar to U.S. registered partnerships, including details about the partners, their ownership interest and investment amount, and a balance sheet and profit and loss statement.
FOREIGN ACCOUNT REPORTING FOR FOREIGN BUSINESSES
Americans, or American-controlled entities such as companies, partnerships, and trusts, that have foreign-registered financial accounts, may have to file a Foreign Bank Account Report (FBAR), also known as Form 114, on FinCEN’s BSA e-filing system.
The rules state that if an American individual or entity has a total of more than $10,000 in foreign financial accounts that they have signatory authority over, then they have to report all their foreign accounts on an FBAR.
Accounts include bank and investment accounts, as well as individual pension accounts.
Almost all foreign financial institutions are reporting their American account holders’ balance and contact details to the U.S. government too, so it’s an important reporting requirement—though separate from tax filing.
SEEK ADVICE BEFORE REGISTERING A BUSINESS ABROAD
Registering a business abroad is an important decision that has significant ramifications. Tax planning and reporting should always be a key consideration when considering registering a business overseas. An expat tax professional can consider your aims and situation holistically before advising you as to your best path.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Katelynn Minott, CPA is the CEO of Bright!Tax Expat Tax Services, the award-winning U.S. tax provider for Americans living overseas.