US Income Taxes on Foreign Corporations
A foreign corporation that is engaged in a US trade or business at any time during the year must file a return on Form 1120-F. The return is required even if the foreign corporation had no effectively connected income or the income was exempt from US tax under a tax treaty. Moreover, quarterly estimated tax payments are also required to cover the prospective tax liability. A foreign corporation that was not engaged in a US trade or business must file Form 1120-F only if the withholding tax on US source income is insufficient to cover the tax liability. A tax return may also be filed solely as a claim for refund when the withholding tax on US source income is excessive under the provisions of a tax treaty.
The rules change if a foreign corporation is classified as a Controlled Foreign Corporation (CFC) or Passive Foreign Investment Company (PFIC). A foreign corporation or equivalent entity is a CFC if at any time during the year US shareholders own more than 50% of its outstanding voting power stock or more than 50% of the corporation's total value. A foreign corporation or mutual fund is PFIC if more than 75% of the company's income is derived from passive activities or more than 50% of the fair market value of all corporate assets produce passive income.
Our Certified Public Accountants and IRS Enrolled Agents are available to convey the complexity of the US taxation of foreign corporations. We specialize in income tax, accounting and advisory services to
Income Tax Returns for Foreign Corporations with US Source Income
A foreign corporation will be considered engaged in a US trade or business if it maintains a branch, has employees or other dependent agents in the USA. A branch includes any US unincorporated entity, such as a Limited Liability Company, Partnership or Joint Venture. Besides, applicable federal and state income taxes, a foreign corporation with a branch in the USA is also subject to Branch Profits Tax on earnings from the branch that are repatriated abroad.
Because of the complexity of the tax law, we assist foreign corporations with US source income to comply with its US income tax obligations. Our income tax services to foreign companies include
- Preparation of Form 1120-F to report US trade or business or US source income
- Preparation of state income tax returns for foreign corporations
- Claims for a refund of over-collected US income tax due to a backup withholding tax or a tax treaty
- Assistance with tax treaties, "permanent establishment" provisions and certificates of withholding
- Filings for federal and state Employer Identification Numbers (EIN)
- US Branch vs. Subsidiary structures
- Assistance with Branch Profits Tax and thin-capitalization rules
- Tax advisory services and tax planning
- Income tax returns for foreign employees in the USA
Income Tax Compliance for Controlled Foreign Corporations
An annual information return on Form 5471 is required for each Controlled Foreign Corporation (CFC) that does not file a consolidated return with a US parent. Moreover, Form 926 is also required if a US person transfers tangible or intangible property, including cash, to a foreign corporation and immediately after the transfer the US person owns 10% or more of the voting power or value of the transferee.
Another important aspect of the CFC provisions is the anti-deferral regime that applies to certain items of income. Generally, the US tax on a foreign corporation or subsidiary is deferred until earnings and profits are repatriated to the USA as dividends to US shareholders. However, this provision does not apply to Subpart F income earned by a CFC. Examples of Subpart F income include dividends, interest, rents, royalties, certain income from the purchase or sale of goods to a related party, and income from services provided outside the country of incorporation. Consequently, the anti-deferral regime requires more than 10% US shareholders recognize deemed dividend and include in income a pro-rata share of the CFCs Subpart F income.
We address all tax requirements of Controlled Foreign Corporations by proving
- Preparation of Form 5471 - Information Return of US Persons With Respect to Certain Foreign Corporations
- Preparation of Form 926 - Return by a US Transferor of Property to Foreign Corporation
- Accounting and bookkeeping services, including conversion from IFRS and other local accounting standards to the US GAAP
- Assistance to and preparation of tax returns for US shareholders of a CFC
- Interpretation of tax treaty provisions and application of the US transfer pricing regulations
- Assistance with Subpart F income classification and reporting
Taxation of Passive Foreign Investment Companies & Qualified Electing Funds
The PFIC regime aims to tax the passive income earned by US investors in foreign mutual funds and US shareholders of foreign corporations that are classified as passive foreign investment companies. Consequently, US investors are required to file Form 8621 with respect to the PFIC on an annual basis.
The PFIC rules vary significantly depending on the information available to the US investor and the elections made on Form 8621. Investors with sufficient information may elect to treat the PFIC as a Qualified Electing Fund (QEF) and pay taxes currently on a pro-rata share of the PFIC earnings.
Another option is to make a mark-to-market election if the PFIC stock is regularly traded on an established stock exchange. Finally, US investors who do not opt for the QEF or mark-to-market elections are required to defer payment of taxes till the PFIC stock is sold or an excess distribution of PFIC earnings is made. The reporting rules are even more stringent if the PFIC is also a CFC.
We support US investors in foreign mutual funds and passive foreign companies by the provision of specialized services directed to
- Making determinations and QEF, mark-to-market, deemed divided, or deferral elections about the PFIC income
- Preparation of Form 8621 - Information Return by a Shareholder of PFIC or QEF
- Preparation of income tax returns for individual and institutional taxpayers with foreign income or investments
- Tax advisory, accounting, and consultancy services
Should you wish to register for our corporate tax services, you may do so at any time. Did not find what you were looking for? Ask your questions and get a free quote with more information about how we can assist you further. You may also contact us directly.