Australian PTY Ltd and Form 5471
It is not uncommon for US Persons who either previously lived in Australia and/or worked in Australia to have started their own entity to have operated either as an Australian PTY Ltd. At first glance, it does not seem like that big of a deal. Maybe you are a consultant in Australia and found it easier to have your own PTY Ltd in order to operate your business more efficiently. Likewise, you may have started your own company to handle the different clients, payroll, etc. In addition, maybe this PTY Ltd of yours is now defunct, but you are still using it to make investments in Australia toward your retirement, Commonwealth Account, Superannuation, etc. – which is common. The problem is that from a US tax perspective, you are now stuck in the Form 5471, CFC, Subpart F, and GILTI Matrix. Let’s explore the basics of why US taxpayers who have Australian PTY Ltd may be stuck with additional US tax and reporting.
In general, when there is only a single-member LLC –– or in a community property state with two spouses – the entity is disregarded for tax purposes. It means that while the entity still exists — for example in order to protect the owners in case of a lawsuit or other state matter — for IRS tax matters, the taxpayers are not required to file more complicated corporate forms such as the Form 1120s, but instead, the entity is considered disregarded for tax purposes and the individual will then report income as if they were just an individual — using Schedule C of 1040.
International SMLLC & Disregarding the Entity
When it comes to international corporations and entities, the rules are different. A single-member LLC is still treated as a corporation for the most part unless the taxpayer proactively disregards the entity. This can sound easier than it is in practice, especially since the US government has identified certain per se corporations, which are corporations that cannot be disregarded. The reason why this is so important is that some of the most complicated tax forms and tax concepts are contained as part of the international tax regime, including items such as form 5471, Subpart F income & GILTI.
*While the Australia PTY Ltd is not a Per Se Corporation, the Public Ltd Corporation is a Per Se Corporation. Taxpayers with an SMLLC PTY Ltd may want to consider disregarding the entity if applicable.
Reporting Australia PTY Ltd on a Form 5471
While an Australian PTY Ltd can be disregarded for Form 5471 purposes — it may not be beneficial from a US Tax perspective. Taxpayers should consult with a Board-Certified Tax Law Specialist to get an idea of the different pros and cons.
Controlled Foreign Corporation
If the foreign company is owned more than 50% by US persons, then it is considered a Controlled Foreign Corporation — and this will lead taxpayers down the rabbit hole that is Form 5471, Subpart F, and GILTI – which have very complicated tax and reporting requirements, especially in light of the fact that often times the foreign company while not dormant is not operating as some big conglomerate. In a common situation, the company may be a law firm, real estate company, or other services firm – in which the tax and legal work typically far outweigh the benefit of having an Australian PTY Ltd– although the IRS recently approved allowing Taxpayers to claim the same election as a corporation for GILTI purposes, to help soften the blow.
There are five different categories of filers who may have to file Form 5471. Some of these categories of filers only must file in a year in which a certain triggering event occurs — such as acquiring more than 10%; becoming a US person in a specific tax year, or disposing of some of the ownership. Unfortunately, when it involves majority ownership of a controlled foreign corporation, then generally the taxpayers going to have to file in additional years as well — and it can become a very complicated annual tax return.
GILTI versus the Global Intangible Low-Taxed Income regime. As with many things involving the Internal Revenue Service the phrase itself does not reflect the application of the law. It is not limited to either intangible or low-taxed income — and it essentially operates to make sure the taxpayers who do not have distributions of foreign income are still required to pay tax on the foreign income generated in the US. This is despite the fact that the income remains in the foreign corporation and is not distributed to the US person; although certain elections such as a 962 election may limit or eliminate US tax.
Before GILTI – and now in conjunction with GILTI – are the Subpart F Income Rules. These rules act kind sorta like GILTI in that foreign income that is not distributed may still be taxable to the US person. This type of income is generally limited to passive income, although not exclusively — as there are other buckets of income that may be considered subpart F. A person may have both support F and GILTI in the same year.
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