- 1 Disregarding a Foreign Entity for US Tax Purposes on Form 8832
- 2 What Type of Foreign Entity is it?
- 3 Purpose of Form 8832 and Disregarding a Foreign Entity
- 4 What is an Eligible Entity to be Disregarded?
- 5 Foreign Entitiy Default Rule
- 6 Making the Foreign Disregarded Entity Election on Form 8832
- 7 What is a Per Se/Default Corporation?
- 8 Form 8832 Disregarding Foreign Entity Rules can be Complex
- 9 Golding & Golding: About our International Tax Law Firm
Disregarding a Foreign Entity for US Tax Purposes on Form 8832
How to Disregard Foreign Entity US Tax Purposes and Form 8832: Sometimes, having a foreign entity and being a US Taxpayer can be unnecessarily complicated — especially around tax season. Due to the fact that the US tax system for individuals is a citizen based taxation (more accurately, US-Person Based) and not resident based — it may benefit the taxpayer to disregard the foreign entity if it is an eligible entity — to make their IRS reporting less complicated. Some entities are eligible to elect to change their status. The concept behind disregarding an entity for tax purposes is so that the taxpayer does not have to go through the grind of completing all the entity tax returns. If at the end of the day it is a small business such as a domestic single member LLC (SMLLC), then under IRS tax law a single member LLC default tax position is treated as a disregarded entity. Therefore, the taxpayer is able to still obtain the necessary legal protections of having an entity in place, but instead of completing various corporate tax returns, the taxpayer can simply report the income directly on their own tax return using a Schedule C.
When it comes to disregarding a foreign entity — as with anything related to international tax — it is a much more complicated undertaking. Let’s go through the basics of How to disregard a foreign entity.
What Type of Foreign Entity is it?
It is important to understand what type of foreign entity a taxpayer has before determining whether or not the entity can be disregarded. That is because there are different default and disregarding rules depending on the specific type of entity at hand.
Purpose of Form 8832 and Disregarding a Foreign Entity
“An eligible entity uses Form 8832 to elect how it will be classified for federal tax purposes, as a corporation, a partnership, or an entity disregarded as separate from its owner. An eligible entity is classified for federal tax purposes under the default rules described below unless it files Form 8832 or Form 2553, Election by a Small Business Corporation. See Who Must File below. The IRS will use the information entered on this form to establish the entity’s filing and reporting requirements for federal tax purposes.
Note. An entity must file Form 2553 if making an election under section 1362(a) to be an S corporation TIP A new eligible entity should not file Form 8832 if it will be using its default classification (see Default Rules below).”
What is an Eligible Entity to be Disregarded?
- “An eligible entity is a business entity that is not included in items 1, or 3 through 9, under the definition of corporation provided under Definitions. Eligible entities include limited liability companies (LLCs) and partnerships. Generally, corporations are not eligible entities. However, the following types of corporations are treated as eligible entities:
An eligible entity that previously elected to be an association taxable as a corporation by filing Form 8832. An entity that elects to be classified as a corporation by filing Form 8832 can make another election to change its classification (see the 60-month limitation rule discussed below in the instructions for lines 2a and 2b).
A foreign eligible entity that became an association taxable as a corporation under the foreign default rule described below.”
What Does This Mean? It means that in order to qualify as an eligible entity, it cannot be excluded as “eligible.” And, while corporations generally do not qualify as eligible, some corporations may still qualify for Form 8832.
Foreign Entitiy Default Rule
Unless an election is made on Form 8832, a foreign eligible entity is:
A partnership if it has two or more members and at least one member does not have limited liability.
An association taxable as a corporation if all members have limited liability.
Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.
What Does This Mean? This means that unless a foreign entity seeks to modify its status in the U.S., these are the “default” positions. In other words, if no Form 8832 election is made, these are the default positions for foreign entities for US tax purposes.
It means from a baseline perspective the default rules provide that a foreign company will be considered a partnership for U.S. tax purposes if there are more than two members and at least one of those members does not have limited liability (similar to a general partnership in the United States)
as with a Corporation in the United states, a foreign entity will be deemed to be treated as a Corporation if all members have limited liability — similar to your typical Corporation in which the members of the Corporation are usually limited to their investment in the company for liability purposes (aka “limited”)
In order for a foreign entity to be considered a disregarded entity for U.S. tax purposes, it must have a single owner that does not have a limited liability. in other words, it is a single owner who does not have liability limited such as a Corporation in which the members have a limited type of liability.
Making the Foreign Disregarded Entity Election on Form 8832
As provided by the IRS:
“Making an Election
A foreign entity that has at least one owner that does not have limited liability, electing to be classified as an association taxable as a corporation.
A foreign entity with a single owner having limited liability, electing to be an entity disregarded as an entity separate from its owner.
A foreign entity electing to change its current classification (even if it is currently classified under the default rule).”
What Does This Mean
In order to disregard a foreign entity, it is generally going to be a single owner with limited liability electing to be disregarded as an entity separate from its owner. Therefore, when a person has a foreign entity that has a single owner with limited liability they may be able to elect to be a disregarded entity, unless it is a per se Corporation.
What is a Per Se/Default Corporation?
The US government developed certain rules regarding the disregarding of a foreign entity, and as identified a few hundred types of foreign entities that are not eligible to be disregarded.
Here is the List:
- American Samoa—Corporation
- Argentina – Sociedad Anonima
- Australia Public Limited Company
- Barbados—Limited Company
- Belgium—Societe Anonyme
- Belize—Public Limited Company
- Bolivia—Sociedad Anonima
- Brazil—Sociedade Anonima
- Bulgaria—Aktsionerno Druzhestvo
- Canada—Corporation and Company
- Chile—Sociedad Anonima
- People’s Republic of China—Gufen Youxian Gongsi
- Republic of China (Taiwan) —Ku-fen Yu-hsien Kung-szu
- Colombia—Sociedad Anonima
- Costa Rica—Sociedad Anonima
- Croatia—Dionicko Drustvo
- Cyprus—Public Limited Company
- Czech Republic—Akciova Spolecnost
- Ecuador—Sociedad Anonima or Compania Anonima
- Egypt—Sharikat Al-Mossahamah
- El Salvador—Sociedad Anonima
- European Economic Area/European Union —Societas Europaea
- Finland—Julkinen Osakeyhtio/Publikt Aktiebolag
- France—Societe Anonyme
- Greece—Anonymos Etairia
- Guatemala—Sociedad Anonima
- Guyana—Public Limited Company
- Honduras—Sociedad Anonima
- Hong Kong—Public Limited Company
- India—Public Limited Company
- Indonesia—Perseroan Terbuka
- Ireland—Public Limited Company
- Israel—Public Limited Company
- Italy—Societa per Azioni
- Jamaica—Public Limited Company
- Japan—Kabushiki Kaisha
- Kazakstan—Ashyk Aktsionerlik Kogham
- Republic of Korea—Chusik Hoesa
- Latvia—Akciju Sabiedriba
- Lithuania—Akcine Bendroves
- Luxembourg—Societe Anonyme
- Malta—Public Limited Company
- Mexico—Sociedad Anonima
- Morocco—Societe Anonyme
- Netherlands—Naamloze Vennootschap
- New Zealand—Limited Company
- Nicaragua—Compania Anonima
- Nigeria—Public Limited Company
- Northern Mariana Islands—Corporation
- Norway—Allment Aksjeselskap
- Pakistan—Public Limited Company
- Panama—Sociedad Anonima
- Paraguay—Sociedad Anonima
- Peru—Sociedad Anonima
- Philippines—Stock Corporation
- Poland—Spolka Akcyjna
- Portugal—Sociedade Anonima
- Puerto Rico—Corporation
- Romania—Societe pe Actiuni
- Russia—Otkrytoye Aktsionernoy Obshchestvo
- Saudi Arabia—Sharikat Al-Mossahamah
- Singapore—Public Limited Company
- Slovak Republic—Akciova Spolocnost
- Slovenia—Delniska Druzba
- South Africa—Public Limited Company
- Spain—Sociedad Anonima
- Surinam—Naamloze Vennootschap
- Sweden—Publika Aktiebolag
- Switzerland— Aktiengesellschaft
- Thailand—Borisat Chamkad (Mahachon)
- Trinidad and Tobago—Limited Company
- Tunisia—Societe Anonyme
- Turkey—Anonim Sirket
- Ukraine—Aktsionerne Tovaristvo Vidkritogo Tipu
- United Kingdom—Public Limited Company
- United States Virgin Islands—Corporation
- Uruguay—Sociedad Anonima
- Venezuela—Sociedad Anonima or Compania Anonima
Form 8832 Disregarding Foreign Entity Rules can be Complex
In conclusion, when a US Person has a foreign entity, they may qualify to have entity disregarded for tax purposes. This may or may not be benefit depending on the income and reporting requirements. Not all foreign entities qualify for the foreign, so it is important to make sure the entity qualifies to be disregarded.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure and compliance, including taxes for expats. Contact our firm for assistance.