The US Treasury has issued long-awaited regulations specifying the domestic taxpayers who have to disclose…
If you are an American entrepreneur with a foreign business interest or operating abroad then you should be aware of U.S. tax reporting obligations on non-U.S. businesses. If a U.S. taxable person (U.S. citizens or U.S. green card holders) owns a controlling stake in a foreign business, that business is likely a Controlled Foreign Corporation (CFC) for U.S. tax purposes. CFCs are subject to potentially complex U.S. tax reporting requirements and, at a minimum, must file U.S. tax Form 5471 every year, whether or not the business is profitable. Even if no tax is due, failure to file a Form 5471 can result in large penalties.
CFC income reporting requirements (most importantly, the so-called “subpart F income” and “passive foreign investment income” rules) are designed to prevent Americans from using foreign businesses to shelter income from U.S. taxation. On the other hand, many American expat entrepreneurs have an often overlooked opportunity to employ conventional U.S. qualified retirement plans to significantly mitigate tax due on foreign sourced income and build retirement account assets.
American entrepreneurs abroad who partner with non-U.S. persons may find that their U.S. connection brings unwanted U.S. reporting requirements and scrutiny. Aside from the CFC rules discussed above, the new FATCA (Foreign Account Tax Compliance Act) requires ownership stakes in non-U.S. private business to be reported on Form 8938. Effectively, these reporting requirements force any business with U.S. partners to prepare financial statements to U.S. standards and submit that information to the IRS so that the U.S. partners’ tax liability can be determined. Enforcement of such onerous rules has significantly ratcheted up with the introduction of FATCA and has resulted in many cases of U.S. partners being shunned from foreign business ventures.
It should also be noted that where a U.S. partner (or even a U.S. employee) has signing authority over a business-related financial account, a Foreign Bank Account Report (FBAR) must be filed annually to disclose the account to the U.S. Treasury Department. Failure to properly make FBAR disclosures can result in extraordinarily high U.S. penalties, even when no tax is due.
Finally, self-employed Americans abroad are normally required to pay 15.3% U.S. self-employment tax (Social Security and Medicare) on self-employment income. Social Security Totalization agreements maintained by the U.S. with other countries may exempt the entrepreneur from paying U.S. self-employment tax when similar taxes are being paid locally.