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What compliance does a C corporation owned by foreign nationals need to do?
Sure, I can address. A corporation formed in a particular state in the United States represents a domestic corporation (“DC”) for tax purposes (Section 7701(a)(3 and 4)). A DC in existence for any part of the year files 1120 corporate tax return (Treasury Regulation Section 1.6012-2(a)).Corporate officers file the DC return before the 15th days of the fourth month of DC’s year end under the general rule (Section 6072(a)). As example, a DC with a 31 December 2022 year end files its return by 15 April 2022. Fiscal year DC’s also follow this rule unless the DC’s tax year ends on 30 June. In this case, the DC files within the 15th day of the third month or 15 September following the fiscal year close (Treasury Regulation Section 1.6072-2T(a)(2)). DC may postpone fling it return by filing an extension with Treasury by DC’s due date. This extension allows DC an additional five months for filing the return (Section 6081(b)). If DC owes taxes and has not made estimated tax payments, DC will incur additional penalties by not paying taxes due at the return date. This statement means • DC can pushback the filing date but not the tax paying date.A DC pays 21% tax on its taxable income which represents a favorite tax rate (Section 11(b)). However, a DC ran physically from the US has a lower rate of 13 1/8 for its income coming from any non US customers. Treasury calls this income foreign derived intangible income (“FDII”). Here, DC finds its FDII and subtracts a 10% return on its assets. DC then claims a 37.5% deduction on the return. By following this more complex tax law provision, DC gains a lower rate from foreign services and products when DC operates from the US (Section 250A(a) and (b)). Note, this lower rate provision does not apply for a DC ran physically from a non US location (Sections 250A(b)(3)(A)(i)(VI) and 904(d)(2)(J)).If the DC founders/officers run DC from a non US location, DC may have a foreign branch operating in the founders home country. This fact means DC may have tax reporting and paying requirements in the home country. Here, you would talk to your home country tax advisor. As example a DC selling to US customers and ran physically from the corporate officers home country has foreign source service income in the US (Section 862(a)(3). However, the DC has home country service income at the home country location.Result: DC files a foreign branch return in its home country on the taxable income generated out of the foreign branch and pays tax on this income in the home country. DC then files 1120 corporate tax return in the US and computes its tax on its worldwide taxable income. However, DC may reduce its taxes in the US for the taxes paid in the home country on the foreign source service income which the DC foreign branch generated (Section 901)). So, DC does not have double taxation on the same income. However, the tax offset may not exactly match if each country has different tax rates (Section 904(a)).In addition, DC has annual information reporting requirements. First not filing this four page information report or filing an incomplete report may result in a $25,000 fine (6038A(d)). Treasury requires this report for a DC with 25% or greater foreign shareholders (a)(2)). Taxpayer files this report with the 1120 corporate tax return.I have completed the above tax analysis based on the scenario presented. If the situation changes any, the tax results may change. www.rst.tax
If a US citizen owns 100% of a controlled foreign corporation which has no assets in the US, does the CFC pay taxes to the IRS?
No, absolutely not. The company’s status as a CFC does NOT make the company itself subject to US tax. So, the company can earn all the income it wants, and it won’t ever owe anything to the IRS.This is the structure my expat entrepreneur clients usee. Operating their business through a non-US corporation allows them to (i) pay zero US tax on the first $100k or so of salary from the company and (ii) defer US tax on the company’s net earnings above their salary. Here’s more detail: How to Structure your Non-US Business or Profession - U.S Tax ServicesHowever, the company’s status as a CFC does have a potential impact on you. If the company earns any “Subpart F income,” then you will be required to include that amount in your income, even if the company doesn’t pay a dividend to you. (But you’re not subject to US tax again when the company does pay a dividend.)There are all sorts of Subpart F income. The most common type is passive income-interest, dividends, rent, and gain on sale of assets that produce that income. The way to avoid Supbart F income is by investing your company’s retained earnings in assets that don’t produce current income, like exchange traded funds.Finally, don’t forget that you’ll have some fancy forms to include in your tax return by reason of your ownership of a non-US company. More detail here: Own Stock of a Non-US Corporation? The IRS Wants to Know All About it - U.S Tax Services
How can a foreign company repatriate their revenue/profits, and what are the taxes they need to pay?
Repatriating funds consists of the transfer of the funds within the parent company from a division legally registered in one country to one registered in another. Any significant funds are likely to be invested in securities of some sort, and repatriating the funds wouldn’t necessarily move the money, but only change the ownership.The tax rules changed in 2022 under the Tax Cuts and Jobs Act enacted last December. Previously US Corporations could defer payment of taxes on income generated by their foreign subsidiaries. According to the Tax Foundation, the new lawEnacts deemed repatriation of currently deferred foreign profits, at a rate of 15.5 percent for cash and cash-equivalent profits and 8 percent for reinvested foreign earnings.There are many special cases and additional conditions. For additional details, see https://tax.thomsonreuters.com/m...
How does a Delaware Corporation that owns a foreign corporation handle its 2022 repatriated tax reporting?
Sure, I can address as the new 2022 tax act created considerable tax changes here. First, as you noted in your question • the tax C Delaware Corporation (“DC”) owns 100% of the shares of a foreign corporation which we call a controlled foreign corporation (“CFC”) as noted in Section 951(b). As Treasury says US persons owning greater than 50% of the shares of a foreign corporation has a CFC for tax purposes (Sections 957(b) and 958(a)).In this scenario. The tax C Delaware corporation represents the US person as noted in Sections 957(c) by reference from Section 7701(a)(30)(C). As a side note, the term tax C comes from the fact we use subchapter C tax law for the Delaware corporation or for any other corporation formed under a state statue in the US (Treasury Regulation Section 301.7701-2(b)(1)).The tax C corporation includes the CFC’s deferred accumulated earnings as income it its 1120 corporate tax return for 2022 (Section 965(a)). So, all past income the CFC has generated ends up on the tax C’s tax return for 2022. Further, this tax law provision also requires a foreign corporation (non CFC) with a tax C owner to include such income in its return as noted in subsection (e).The mechanics of this tax provision play out in various steps. First, these deferred earnings represent subpart F income as noted in subsection (a). This fact allows for the inclusion in the 2022 year as subpart F income always get included.This income faces a 15.5% tax for deferred foreign profits made up of cash like investments and a 8% tax for foreign deferred foreign profits made up of non cash investments (subsection (c)). Since the tax C gets taxed at 35% in 2022. and the C includes the full foreign deferred income in the tax C’s return, the C takes a expense deduction for equalizing the rates down to 15.5% and 8% for this particular income (paragraph (2)(A) and (B)).The CFC or other deferred corporation may use its past foreign taxes paid for reducing the tax C’s tax in the US. However, the tax C can only use a portion of these tax credits as noted in subsection (g). The C reduces the credits by 77.1% for the 8% tax and 55.7% for the 15.5% tax as covered in paragraph (2)(A) and (B)).Further, the taxpayer may elect installment payments under Section 965(h).As in all things tax, we are dealing with complex tax law issues here. As I have simplified the above provision for readability. Though, we work through the complexities for filing an accurate and timely 1120 return including the 965 Transaction statement mentioned below.As a side note, Treasury issued a news release (IR-2018-53 March 13, 2022. providing tax mechanical direction for computing these amounts as they provided a Section 965 Transaction statement format.A calendar year tax C corporation has available a six month extension with a final due date of 15 October 2022 as noted in Section 6018(b) for filing the 1120 tax return. The tax C files a Form 7704 for obtaining an extension for filing as noted in Treasury Regulation Section 1.6081-5(b)(2).So, one tax strategy we use centers on estimating amounts and filing the extension election and the above 965(h) installment election with an repatriated tax estimated payment. This provides time for completing a more accurate 2022 return given the particular complexities for this particular year. Another strategy centers on having an outside tax person familiar with international US tax law handle the 965 Transaction report only as a separate engagement. As computing the repatriated earnings from the CFC have very little to do with actually filing the 1120 return.I have included the above information based on subchapter N tax law. If the situation changes in any way, the tax results may change considerably. www.rst.tax
Do I need to file form 5472 after dissolving a dormant (no transactions) foreign owned single-member Delaware LLC? If yes, then what is the time period that I have in order to file it?
If you have a single-member LLC formed in the US (including Delaware), the LLC existed during 2022. and this single-member is a non-US resident, then yes, dissolving/cancelling the LLC is a “reportable transaction” that must be reported on Form 5472. The due date was April 18, 2022. unless your LLC had a reason to have a fiscal year that did not match the calendar year.New Requirement from changed IRS regulations regarding Foreign-Owned US Disregarded EntitiesUnder new regulations issued in 2022. a domestic disregarded entity (including single-member LLCs) which is wholly owned by a foreign person is now treated as a US corporation solely for the purposes of Section 6038A of the Internal Revenue Code (IRC). No new income tax or income tax reporting obligations were created.According to the new regulations:A FOUSDE (Foreign-Owned US Disregarded Entity) must obtain a federal Employer Identification Number, also known as an EIN or federal tax number.A FOUSDE must keep books and records as required under IRC Section 6001. These books and records must be sufficient to establish the correctness of the reporting FOUSDE’s return, including information or records that might be relevant to determine the correct treatment of transactions with related parties.To facilitate entities• compliance with the requirements of section 6038A, including the obligation of reporting corporations to file Form 5472, the final regulations prthat these entities have the same US taxable year as their foreign owner if the foreign owner has a U.S. return filing obligation. If the foreign owner has no U.S. return filing obligation, then for ease of tax administration, the final regulations prthat the taxable year of these entities is the calendar year unless otherwise provided in forms, instructions, or published guidance.If there were any “reportable transactions” with a foreign or domestic related party, the FOUSDE must file Form 5472 by the due date of a corporate return. Unless the FOUSDE has income effectively connected with the US, its due date would be three and half months after the beginning of the new calendar year, or April 15.In order to complete 5472, a Form 1120 must be submitted. The only information required to be on the Form 1120 is the name and address of the FOUSDE and Items B and E on the first page, plus “Foreign-owned U.S. DE” should be written across the top of the Form 1120 with Form 5472 attached.The fully completed Form 5472 gets attached to the pro-forma Form 1120, and can be filed by either faxing them to +1(855)887-7737, or by mail/courier to Internal Revenue Service, 201 West Rivercenter Blvd, PIN Unit, Stop 97, Covington, KY 41011.When: For FOUSDEs created or existing during 2022. the due date is April 16, 2022. Due date can be extended six months by filing Form 8007. See special instructions below regarding the filing of an extension.Who: Any single-member LLC or other disregarded entity formed in the US which had “reportable transactions" whose owner is not a US person.A reportable transaction is:Any type of transaction listed in Part IV of Form 5472 (e.g., sales, rents, etc.) for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year, or any transaction or group of transactions listed in Part IV, if:1. Any part of the consideration paid or received was not monetary consideration, or2. Less than full consideration was paid or received. Transactions with a U.S. related party, however, are not required to be specifically identified in Parts IV and VI.What else is needed:All FOUSDEs need to have a US federal tax number, known as a Federal Employer Identification NumberThe single member will need to have a US ITIN, file an application for an ITIN along with the 1120 and 5472, or if it is an entity, obtain an EINAll FOUSDEs will need to maintain books and records sufficient to document the reported transactions, and must maintain those records for at least 6 years.Penalties for failure to file Form 5472A penalty of $10,000 will be assessed on any reporting corporation that fails to file Form 5472 when due and in the manner prescribed. The penalty also applies for failure to maintain records as required by Regulations section 1.6038A-3.Note. Filing a substantially incomplete Form 5472 constitutes a failure to file Form 5472.Each member of a group of corporations filing a consolidated information return is a separate reporting corporation subject to a separate $10,000 penalty and each member is jointly and severally liable.If the failure continues for more than 90 days after notification by the IRS, an additional penalty of $10,000 will apply. This penalty applies with respect to each related party for which a failure occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period ends.Criminal penalties under Internal Revenue Code Sections 7203, 7206, and 7207 may also apply for failure to submit information or for filingIRS Examples of the new regulationThe following examples illustrate the application of paragraph (b)(3) of this section:Example 1. (i) In year 1, W, a foreign corporation, forms and contributes assets to X, a domestic limited liability company that does not elect to be treated as a corporation under § 301.7701–3(c) of this chapter. In year 2, W contributes funds to X. In year 3, X makes a payment to W. In year 4, X, in liquidation, distributes its assets to W. (ii) In accordance with § 301.7701–3(b)(1)(ii) of this chapter, X is disregarded as a entity separate from W. In accordance with § 301.7701–2(c)(2)(vi) of this chapter, X is treated as an entity separate from W and classified as a domestic corporation for purposes of section 6038A. In accordance with paragraphs (a)(2) and (b)(3) of this section, each of the transactions in years 1 through 4 is a reportable transaction with respect to X. Therefore, X has a section 6038A reporting and record maintenance requirement for each of those years.Example 2. (i) The facts are the same as in Example 1 of this paragraph (b)(9) except that, in year 1, W also forms and contributes assets to Y, another domestic limited liability company that does not elect to be treated as a corporation under § 301.7701–3(c) of this chapter. In year 1, X and Y form and contribute assets to Z, another domestic limited liability company that does not elect to be treated as a corporation under § 301.7701–3(c) of this chapter. In year 2, X transfers funds to Z. In year 3, Z makes a payment to Y. In year 4, Z distributes its assets to X and Y in liquidation. (ii) In accordance with §301.7701–3(b)(1)(ii) of this chapter, Y and Z are disregarded as entities separate from each other, W, and X. In accordance with § 301.7701–2(c)(2)(vi) of this chapter, Y, Z and X are treated as entities separate from each other and W, and are classified as domestic corporations for purposes of section 6038A. In accordance with paragraph (b)(3) of this section, each of the transactions in years 1 through 4 involving Z is a reportable transaction with respect to Z. Similarly, W’s contribution to Y and Y’s contribution to Z in year 1, the payment to Y in year 3, and the distribution to Y in year 4 are reportable transactions with respect to Y. Moreover, X’s contribution to Z in Year 1, X’s funds transfer to Z in year 2, and the distribution to X in year 4 are reportable transactions with respect to X. Therefore, Z has a section 6038A reporting and record maintenance requirement for years 1 through 4; Y has a section 6038A reporting and record maintenance requirement for years 1, 3, and 4; and X has a section 6038A reporting and record maintenance requirement in years 1, 2, and 4 in addition to its section 6038A reporting and record maintenance described in Example 1 of this paragraph (b)(9).DefinitionsDisregarded Entity (DE)Usually an LLC. This is a legal entity that has a single owner, and the single owner is considered the taxpayer, not the entity. Under IRS regulations, when a new LLC with just one member is formed in the US, by default it is considered to be a disregarded entity.Foreign-owned U.S. DE (FOUSDE)A foreign-owned U.S. DE is a domestic DE that is wholly owned by a foreign person.For tax years beginning on or after January 1, 2022. and ending on or after December 13, 2022. a foreign-owned U.S. DE is treated as an entity separate from its owner and classified as a corporation forthe limited purposes of the requirements under section 6038A that apply to 25 percent foreign-owned domestic corporations.Responsible PersonWhen a person applies for a US federal tax number, known officially as an Employer Identification Number or EIN, they use form SS-4. This form must be signed by a Responsible Person. The IRS definition of this responsible person is, “'The ‘responsible party• is the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. The person identified as the responsible party should have a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the person, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.' [IRS emphasis]In the past, the IRS usually interpreted this to mean a Member, and the confirmation letter addressed to a single-member LLC obtaining a new tax number will be addressed to "[person's name] Sole Member"If the responsible person is no longer with the entity, or otherwise no longer fits the description, then the entity must file Form 8822-B to inform the IRS of the new responsible person.Foreign personA foreign person is:An individual who is not a citizen or resident of the United States,An individual who is a citizen or resident of a U.S. possession who is not otherwise a citizen or resident of the United States,Any partnership, association, company, or corporation that is not created or organized in the United States,Any foreign estate or foreign trust described in section 7701(a)(31), orAny foreign government (or agency or instrumentality thereof) to the extent that the foreign government is engaged in the conduct of a commercial activity as defined in section 892.However, the term “foreign person” does not include any foreign person who consents to the filing of a joint income tax return.Reportable transactionA reportable transaction is:Any type of transaction listed below (e.g., sales, rents, etc.) for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting FOUSDE’s tax year, orAny transaction or group of transactions listed below, if:1. Any part of the consideration paid or received was not monetary consideration, or2. Less than full consideration was paid or received.Sales or purchases of Inventory or tangible propertyCost sharing transaction payments paid or receivedRents received or paidRoyalties received or paidPurchases, leases, licenses, etc of intangible property rights (e.g., patents, trademarks, secret formulas)Consideration received or paid for technical, managerial, engineering, construction, scientific, or like servicesCommissions paid or receivedAmounts borrowed or loanedInterest received or paidPremiums received or paid for insurance or reinsuranceOther amounts paid or received that would be included on a Federal income tax returnIn addition, as a FOUSDE, Reportable Transactions further include amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the entity, including contributions to and distributions from the entity.The reporting FOUSDE must attach a schedule describing each reportable transaction, or group of reportable transactions. The description must include sufficient information so that the nature and approximate monetary value of the transaction or group of transactions can be determined. The schedule should include:1. A description of all property (including monetary consideration), rights, or obligations transferred from the reporting corporation to the foreign related party and from the foreign related party to the reporting corporation;2. A description of all services performed by the reporting corporation for the foreign related party and by the foreign related party for the reporting corporation; and3. A reasonable eof the fair market value of all properties and services exchanged, if possible, or some other reasonable indicator of value.If the entire consideration received for any transaction includes both tangible and intangible property and the consideration paid is solely monetary consideration, report the transaction in Part IV instead of Part VI if the intangible property was related and incidental to the transfer of the tangible property (e.g., a right to warranty services).Direct 25% foreign shareholderA foreign person is a direct 25% foreign shareholder if it owns directly at least 25% of the stock of the reporting corporation by vote or value. Since a single member owns 100% of the stock of the LLC, and 100% is greater than 25%, then if the single member is a foreign person this applies.Ultimate indirect 25% foreign shareholderAn ultimate indirect 25% foreign shareholder is a 25% foreign shareholder whose ownership of stock of the reporting corporation is not attributed (under the principles of section 958(a)(1) and (2)) to any other 25% foreign shareholder. See Rev. Proc. 91-55, 1991-2 C.B. 784.Related party.A related party is:Any direct or indirect 25% foreign shareholder of the reporting corporation,Any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the reporting corporation,Any person who is related (within the meaning of section 267(b) or 707(b)(1)) to a 25% foreign shareholder of the reporting corporation, orAny other person who is related to the reporting corporation within the meaning of section 482 and the related regulations.“Related party” does not include any corporation filing a consolidated Federal income tax return with the reporting corporation.The rules in section 318 apply to the definition of related party with the modifications listed under the definition of 25% foreign shareholder, above.Who This Applies ToDisregarded entities (usually limited liability companies/LLCs) formed under the laws of one of the states of the United States, which were formed during or before 2022. and whose single member is considered to be a “foreign person,” must file Form 5472 if they have had a Reportable Transaction during 2017.Extension of Time to file by foreign-owned U.S. Disregarded EntityA foreign-owned U.S. disregarded entity (DE) required to file Form 5472 can request an extension of time to file by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns. The DE must file Form 7004 by the regular due date of the return. Because the Form 5472 of a DE must be attached to a pro forma Form 1120, the code for Form 1120 should be entered on Form 7004, Part I, line 1. "Foreign-owned U.S. DE" should be written across the top of Form 7004. For further general information, see the Instructions for Form 7004.The DE should send Form 7004 to:Internal Revenue Service201 West Rivercenter Blvd.PIN Unit, Stop 97Covington, KY 41011Or, the DE can fax (300 DPI or higher) the form to (855) 887-7737.Caution: For these entities, do not use the regular filing address listed in the Instructions for Form 7004.Further ReadingFrom the source: The IRSGeneral Information Links about Form 5472Form 5472Form 5472 InstructionsForm 5472 Flow chartPlease be sure to read the above definitions BEFORE trying to understand the chart.
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