Do Expat-Owned Foreign Businesses Report Entities to IRS?

Do Foreign Business with US Expats Report Entity Ownership

Foreign Business and US Expats

A US Expat is a US Citizen or even a Lawful Permanent Resident who resides overseas the majority of the time. As a US Expat, a person may live overseas and earn all their money overseas, but they are still considered US persons for US tax purposes – even if they have already paid foreign taxes on the income generated abroad. It is very common for expats to also have an entrepreneurial spirit and once they land in a new country they may develop one or more small businesses – or even medium size to larger businesses. Even though their business operates outside of the United States, and they reside outside of the United States, expats with foreign businesses still have US tax and reporting requirements. The extent of the tax and reporting of the foreign business will depend on the type of business, the ownership percentage, and whether the business is considered a controlled foreign corporation with either subpart F or GILTI income. Let’s walk through the basics about how expats with foreign businesses may have US Tax and Reporting requirements.

Worldwide Income

The first and most important aspect of international tax for expats who are still considered US persons is that they are subject to US tax on their worldwide income. The word US person is not limited to just US citizens, but also includes Lawful Permanent Residents and foreign nationals who meet the substantial presence test. In addition, US expats are not only required to report their foreign income but they are also required to disclose ownership in a foreign business or entity.

Sole/Solo, Flowthrough Entity, or Corporation

Like the United States and limited liability company rules/S-corporation rules, many foreign countries have entities that operate as a flow-through. This means that the income is not taxed at the entity level but is instead taxed at the individual level. In this type of situation, the individual would have to report all their income because it was received individually. Additionally, taxpayers may have to file a form 8832/8858 for foreign disregarded entities.

Majority owned by US Persons or Not (CFC)

If the foreign entity is owned more than 50% by US persons, then technically the company is referred to as a Controlled Foreign Corporation or CFC.  When a foreign entity is considered a CFC it gets in infinitely more complicated in terms of tax and reporting. The US person may have to file ongoing form 5471s and income may be taxable even if it was never distributed to the US person — in accordance with the Subpart F Income rules and GILTI. Controlled Foreign Corporations tend to have much more significant reporting requirements than other non-CFC entities and something for expats should keep in mind.

Non-CFC/Non-SFC

If the foreign company is neither a controlled foreign corporation nor a specified foreign corporation, then while it is still a headache it is nowhere near as bad as the CFC income and reporting rules. Subpart F and GILTI do not apply to SFC/SFC companies. Likewise, Form 5471 is generally not required every year and is usually only necessary in years in which an event occurs such as becoming a 10% owner, becoming a US person in a year in which a person owns at least 10%, or relinquishing a portion of ownership sufficient to bring ownership below 10%.

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 that 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 of the Streamlined Procedures. 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. 

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.