Foreign individuals and foreign companies can own businesses in the United States, but foreign ownership can significantly change the business’s U.S. tax compliance obligations.
The first question is not simply:
“Is the company foreign-owned?”
The more useful question is:
“How is the U.S. business classified for federal tax purposes, and who owns it?”
A U.S. business with foreign owners may be taxed as a:
- C corporation;
- partnership; or
- disregarded entity.
S corporation treatment generally is not available when a shareholder is a nonresident alien.
Each classification creates a different combination of income-tax returns, information reporting, and potentially withholding obligations.
U.S. Entity and Federal Tax Classification Are Different
An LLC is a legal entity formed under state law. Its federal tax classification is a separate question.
A foreign person could therefore own:
- a U.S. corporation;
- an interest in a U.S. partnership; or
- a U.S. single-member LLC that is disregarded for federal income tax purposes.
A U.S. LLC may also elect corporate classification.
The tax return cannot be determined simply from the letters “LLC” in the company’s legal name.
Foreign-Owned C Corporation
A domestic C corporation remains a U.S. taxpayer even when some or all of its shareholders are foreign.
The corporation generally files Form 1120 and pays U.S. corporate income tax on its taxable income.
Foreign ownership, however, can create additional information-reporting requirements.
Form 5472
IRC §6038A generally applies to a domestic corporation that is at least 25% foreign-owned.
If the corporation has reportable transactions with related parties, it may be required to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.
Reportable transactions can include various transactions between the U.S. corporation and its foreign owner or other related parties, including:
- sales and purchases;
- rents;
- royalties;
- services;
- commissions;
- loans;
- interest; and
- other specified related-party transactions.
Form 5472 is an information return. Its filing requirement is separate from whether the related-party transaction ultimately increases or decreases the corporation’s U.S. income tax.
The reporting rules also include record-maintenance requirements under IRC §6038A.
Payments to Foreign Shareholders and Related Parties
A U.S. corporation making certain U.S.-source payments to foreign persons may also have withholding and reporting responsibilities under Chapter 3
