Foreign LLCs & US Taxes

US Tax Reporting Requirements for Owners or Directors of Foreign Corporations

Expats.cz

Written by Expats.cz
Published on 29.11.2006 10:44 (updated on 29.11.2006)

Written by John W. Mohr
of CFO2GO Europe

US Tax Reporting Requirements for Owners or Directors of Foreign Corporations
 
Have you established a local limited liability company (LLC) or partnership to hold your interest in property or to manage a business? Are you simply a secretary or director of that interest? Many otherwise well-informed executives are surprised to discover that they and their small foreign corporation or partnership subject to several US reporting requirements from the moment they acquire a 10% or greater interest.

The most onerous forms and attached schedules, so-called information returns, are used to satisfy the reporting requirements under Sections 6038 and 6046 of the Internal Revenue Code – primarily, to provide the IRS the information necessary to tax income to US taxpayers on a current basis.  Its primary result is to negate the “off-shoring” of earnings to avoid or defer income taxation. The forms capture information on reportable transactions with related parties; subpart F income subject to current taxation (including income from property in the US); and whether the place of business of your foreign operation is really foreign.

The penalties for not filing an information return when due begin at USD 10.000 and can rise to USD 100.000 per filing, regardless of whether tax is due. Also, due to the complexity of the forms and the requirement that they be reported in US GAAP, the cost of compliance can be extraordinary.

That said, you might still have the option to elect how your investment will be treated for tax purposes in the US, which can reduce the complexity or cost of the reporting or both.  Depending on several factors, you may elect to have your investment in the LLC treated as a corporation, partnership or as an entity disregarded from yourself.

The three main information returns requested of US taxpayers each year by the IRS are:

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– 5471 Information Return of US Persons With Respect to Certain Foreign Corporations
– 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships
– 8858 Information Reporting With Respect to FDEs

There are numerous other forms that may be required. I list just a few of them here:

– SS-4 Application for Employer Identification Number
– 8832 Entity Classification Election
– TD-90 22.1 Report of Foreign Bank and Financial Accounts
– 926 Return by a US Transferor of Property to a Foreign Corporation, Foreign Estate, or Foreign Partnership
– 1040x Amended U.S. Individual Income Tax Return
– 8621 Return by a Shareholder in a Passive Foreign Investment Company

CONCLUSION
 
If you are a US taxpayer, before investing 10% or more into a foreign LLC, take the time to understand what your legal and tax obligations will be – not only vis a vis the Czech Republic, but also the United States. Consider the cost, risk and other burdens of keeping accounts in local and US GAAP and preparing information for local and US tax offices. Most of my clients do very little with their LLC (usually, a Czech s.r.o.) that cannot be efficiently captured and reported to the IRS and local authorities with a little foresight.

CFO2GO is an independent
consultancy focused on assisting SMEs and their owners and executives to achieve
their operating and objectives when internal or alternative means of doing so
are inadequate to the task. We work closely with executives to help them comply
with their personal Czech and US tax obligations.

The comments in this article are not intended to constitute an opinion
regarding any specific tax issues because additional tax issues may exist that
could affect the tax treatment of the tax issues addressed in this memo. 
This memorandum does not consider or reach a conclusion with respect to those
additional issues and was not written and cannot be used for the purpose of
avoiding penalties under code section 6662(d).
 
For further
information, please refer to our web site at www.cfo2goeurope.com or contact John Mohr
at john.mohr[at]cfo2goeurope.com