As our global landscape evolves we find ourselves more mobile than ever. As a US person, there are various tax and compliance reporting requirements when participating in activity outside of the borders of the United States. The following are a few international tax implications to consider when planning business outside of the US. Below are three common scenarios we see in our day-to-day consulting practice:
Are You Considering a Board of Director Position for a Non-US Company?
- Will you have financial interest or signature authority over financial accounts for the company? Are these accounts also outside of the US?
- If so, you may be required to file a Report of Foreign Bank and Financial Accounts (FBAR).
- Are there other US persons involved with this non-US company?
- As a US person holding a board position you may be required to file a Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations if you directly, indirectly or constructively buy or sell shares of the company stock or any other US person buys (or sells) more than 10% of the stock of the company where you hold a board position.
- Will this be a paid board position?
- A US person is required to report their worldwide income on their US individual income tax return each year. In addition to the US filing requirements, you may also have filing requirements in the other country. We recommend consulting a tax professional in the country the company is incorporated to help evaluate any additional filing obligations in that respective country.
Are You Interested in Investing in a Company or Mutual Fund Outside of the US?
- How is the company structured in the country of origin? Will you be a shareholder of a non-US corporation?
- If so, depending on circumstances such as ownership percentage, voting rights, changes in shares during a given year consideration needs to be given to requirements for a Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations, Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund or Form 8938: Statement of Specified Foreign Financial Assets.
- As a shareholder of a non-US corporation did you make a contribution to the corporation of cash or other property?
- If so, you may be required to file a Form 926: Return by a US Transferor of Property to a Foreign Corporation.
- Is the non-US corporation an operating company or an investment company?
- Depending on the level of ownership and control of an operating company you could be required to file a Form 5471 and may be subject to Global Intangible Low Taxed Income (GILTI) rules. You may also have a disclosure requirement via Form 8938.
- If an investment company, again depending on the level of ownership/control, there should be consideration given to both the Subpart F income regime rules reported via Form 5471 and the Passive Foreign Investment Company (PFIC) regime rules reported via Form 8621.
- Will you be a partner in a non-US Partnership?
- If so, you may be required to file a Form 8865: Return of US Persons With Respect to Certain Foreign Partnerships.
- Invested in a mutual fund or pooled fund trusts outside of the US?
- These types of investments are primarily invested in passive assets or generally earn passive income resulting in additional filing requirements under the PFIC tax regime on your US income tax return.
Did You Decide to Move Forward with the Purchase of Your Dream Vacation Home Outside of the United States?
- In addition to the US tax professionals, you work with you may need to also give consideration to engaging a qualified attorney and/or tax professional in the country where the transaction is taking place to assist in navigating the various laws and reporting requirements of the respective country.
- Certain countries like Mexico do not allow non-residents of Mexico to own real estate directly in certain areas of the country and instead require that a corporation or a trust be set up in Mexico to purchase. This results in additional reporting requirements for a US person and could trigger additional filing obligations and taxes in the country the vacation home is located.
- Did you have to set up a bank account in a foreign country as a part of the real estate transaction?
- If so, the FBAR and Form 8938 rules would need to be evaluated.
- Are you the sole owner of the vacation home or did you purchase the property with others?
- The details of the arrangement would need to be evaluated to determine if there are additional reporting requirements on your US return.
- Do you plan to rent out your vacation home?
- In addition to reporting your rental activity on your US income tax return, you also need to consider your reporting requirements via Form 8858: Information Return of US Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs).
It is wise to perform your due diligence when participating in transactions outside of the United States. However, this is not an all-inclusive list of issues or reporting obligations that may arise. As you can easily surmise from this discussion, the US tax system is complex and the rules associated with additional reporting requirements for a US person are very much based on the relevant facts and circumstances of a given situation.
The bottom line is that if you choose to invest or do business outside of the United States we highly recommend consulting a qualified professional to help navigate the impact of this activity as the penalties for not complying are steep. The Anderson ZurMuehlen International Tax Team is pleased to be a resource to you!
This article was written by Dana Cade, CPA and Shareholder in our Helena office.