Foreign Corporations with No Distributed Income
With the globalization of the United States economy, many small-to-mid-size businesses in the United States have expanded globally. Oftentimes, the foreign business will be fully owned by US persons — or at least owned in part by US persons. As a result, there may be one or several international information reporting requirements required by the US persons. Depending on the type of ownership and whether the ownership consists of more than 50% by US persons –– or owned by a domestic corporate shareholder – will impact the extent of the reporting necessary, as well as whether other tax implications such as GILTI and Subpart F income bubble to the surface. One very common question we receive, is whether a foreign corporation with no income is reported to the IRS?
Disclosure of Foreign Corporations
One very important component of US tax law is the international information reporting requirements for US persons who have ownership or interest in a foreign corporation. The failure to properly report the corporation to the IRS may result in significant fines and penalties which is why it is important for shareholders to have a general understanding of what is required. In general, whether or not the foreign corporation actually distributes income is not the threshold to determine whether or not it is reportable on a US tax return. Rather, the key issue is whether the taxpayer qualifies as a category of filer which is deemed necessary to report the ownership interest on an international reporting form, such as Form 5471. For the most common international reporting form for foreign corporations (Form 5471) — there are five categories of filers, with two of the main categories having subcategories.
Taxable Income if Not Distributed
Even if the foreign corporation does not distribute any income, there are other taxable matters to consider which do not require the actual income to be reported. The two important categories include Subpart F Income and GILTI (Global Intangible Low-Taxed Income). Under some circumstances, a Taxpayer can avoid certain taxes by making a Section 962 election.
Resolving the Failure to Report a Foreign Corporation
When a Taxpayer has not properly reported a foreign corporation in one or more prior years, there are various international tax amnesty programs they can submit to in order to safely get into compliance. Taxpayers should consult with a Board-Certified Tax Law Specialist that specializes in this area of international tax law to get a good lay of the land — and assess potential compliance strategies/options.
About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
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