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American Business Owners Abroad - Top 6 US Tax Issues To Be Aware Of

American Business Owners Abroad -  Top 6 US Tax Issues To Be Aware Of
Ines Zemelman, EA
13 November 2019

Congratulations, you’re a business owner! You’ve finally done it; you quit your job and sprung out on your own, you are your own boss! Aside from the painful realization that it’s not all peaches and cream and you actually wind up working more when working for yourself, you also face additional tax reporting burdens (and that’s especially true if you are a US person - which requires you to file special tax forms in the US). This article will summarize your requirements and go over the common pitfalls you should avoid.

1. Most importantly - what forms do I need to file?

You must remember that different countries have different reporting requirements. What may be a simple venture in your residence country may not be treated as such in the U.S. We’ve compiled a table breaking down different business types by country, indicating what the U.S. filing requirement is for your business.

Country

Sole Proprietorship / Schedule C Foreign Coporation / Form 5471 Foreign Partnership / Form 8865

Australia

1.) Sole Trader

 

1.) Pty. Ltd. (Proprietary Limited Company)
2.) LTD (Limited Company)

Pty. (Unlimited Proprietary) Partnership

Austria

1.) eingetragenes Einzelunternehmen 1.) Gesellschaft mit beschränkter Haftung (GmbH)
2.) Aktiengesellschaft (AG)
1.) Offene Gesellschaft (OG)
2.) Kommanditgesellschaft (KG)
3.) stille Gesellschaft (stG)
4.) Gesellschaft des bürgerlichen Rechts (GesbR)

Belgium

1.) Entreprise individuelle (l'entreprise individuelle)
2.) The society (la société)
1.) BeslotenVennootschap met BeperkteAansprakelijkheid (BVBA)
2.) Société Privée à Responsabilité Limitée (SPRL)
3.) NaamlozeVennootschap (NV)
4.) Société Anonyme (SA)
5.) CooperatieveVennootschap met BeperkteAansprakelijkheid (CVBA)
6.) Société coopérative à responsabilité limitée ou illimitée (SCRL or SCRI)
1.) Société en nom collectif (SNC)
2.) Société en commandite simple (SCS)
3.) Société en commandite par actions (SCA)
4.) Vennootschap onder firma (VOF)

Brazil

1.) Empresa individual (firma individual) 1.) Sociedade Limitada (LTDA)
2.) Sociedade por Ações (SA)
3.) Empresa Individual de Responsabilidade Limitada (EIRELI)
4.) Special Purpose Company (SPC)
5.) Micro empreendedor individual
1.) Sociedade em comandita simples
2.) Sociedade em nome coletivo
3.) Sociedade em conta de participação
4.) Sociedade em comum
5.) Parceria silenciosa (SCP)

Canada

1.) Sole Proprietorship 1.) Private Corporations
2.) Public Corporations
1.) General Partnerships
2.) Limited Partnerships

Czech Republic

1.) živnost 1.) Akciová společnost (a.s.)
2.) Společnost s ručením omezeným (s.r.o.)
1.) Veřejná obchodní společnost (v.o.s.)
2.) Komanditní společnost (k.s.)

Chile

1.) Propietario único (Sole Proprietorship)

1.) Sociedad por acciones (S.p.A)
2.) Sociedad Anónima (S.A)
3.) Empresa Individual de Responsabilidad Limitada (EIRL)
4.) Sociedad de responsabilidad limitada (LTDA)

1.) Sociedad de Responsabilidad Limitdada (S.R.L)
2.) Sociedad colectiva (General Partnership)
3.) Sociedad limitada (Limited Partnership)

China

1.) 个体户 (Gètǐhù) - known as Sole Trader

1.) 外商独资企业 (Wàishāng dúzī qǐyè) - known as WOFE
2.) 上海自由贸易区公司 - known as Shanghai FTZ
1.) 外资合作企业 - known as FIPE

Costa Rica

1.) Empresa Individual de Responsabilidad Limitada

The Costa Rican Code of Commerce establishes 
Sole Proprietorship but it is less used in 
Costa Rican business practice.

1.) Sociedad Anónima S.A.
2.) Sociedad de Responsibilidad Limitada S.R.L.

1.) Sociedad Comandita (Limited Partnership)
2.) Sociedad General (General Partnership)

The Costa Rican Code of Commerce establishes above 
partnerships but they are less used in Costa Rican
business practice. 

Denmark

1.) Enkeltmandsvirksomhed 1.) Anpartsselskab ApS
2.) Aktieselskab A/S
3.) Iværksætterselskab IVS
4.) Selskab med begrænset ansvar S.M.B.A
1.) Interessentskab I/S
2.) Kommanditselskab K/S
3.) Partnerselskab or Kommanditaktieselskab P/S

France

1.) Entreprise Individuelle
2.) Auto-entrepreneur
3.) Profession libérale
1.) Société à Responsabilité Limitée (SARL)
2.) Entreprise Unipersonelle à Responsabilité Limitée (EURL)
3.) Société Anonyme (S.A.)
4.) Société par Actions Simplifiées (SAS)
5.) Société par Actions Simplifiées Unipersonnelle (SASU)
1.) Société en Nom Collectif (SNC)
2.) Société en Commandite Simple (SCS)
3.) Société en Commandite par Actions (SCA)

Germany

1.) Einzelunternehmen
2.) Eingetragener Kaufmann (e.K./e.Kfm./e.Kfr.)
1.) Gesellschaft mit beschränkter Haftung (GmbH)
2.) Aktiengesellschaft (AG)
3.) Unternehmergesellschaft (UG)
1.) Offene Handelsgesellschaft (OHG)
2.) Kommanditgesellschaft (KG)
3.) GmbH & Co. KG
4.) AG & Co. KG
5.) GmbH & Co. OHG
6.) Gesellschaft bürgerlichen Rechts (GbR)
7.) Partnerschaftsgesellschaft (PartG)
8.) Kommanditgesellschaft auf Aktien (KGaA)
9.) GmbH & Co. (KGaA)
10.) AG & Co. (KGaA)

Hong Kong

1.) Sole Proprietorship

1.) Private Company Limited by Shares (Limited/有限公司)
2.) Public Company Limited by Shares (Limited/有限公司)
3.) Private Company (Unlimited/無限公司)
4.)  Public Company (Unlimited/無限公司)
1.) General Partnership
2.) Limited Partnership

Ireland

1.) Sole trader
2.) Freelancer
3.) Self employed
1.) Company Limited by Shares (LTD)
2.) Public Limited Company (PLC)
3.) Company Limited by Guarantee (CLG)
4.) Private Unlimited Company with a share capital (ULC)
5.) Public Unlimited Company without a share capital (PULC)
6.) Public Unlimited Company with a share capital (PUC)
7.) Designated Activity Company (DAC)
1.) Limited Liability Partnership (LLP)
2.) Limited Partnership (LP)

Italy

1.) Artigiano
2.) Lavoratore autonomo
3.) Libero professionista
4.) Imprenditore
1.) Società a Responsabilità Limitata (S.r.l.)
2.) Società per azioni (S.p.A.)
3.) Società a Responsabilità Limitata Semplificata (S.r.l.s.)
4.) Società consortile per azioni (S.c.p.a.)
5.) Società in accomandita per azioni (S.a.p.a.)
1.) Società in nome collettivo (S.n.c.)
2.) Società in accomandita semplice (S.a.s.)

Japan

1.) 個人事業 kojin jigyo

1.) 株式会社 (kabushiki-kaisha or kabushiki-gaisha, K.K.)
2.) 合同会社 (gōdō-kaisha or gōdō-gaisha, G.K.)
1.) 任意組合 (nin'i kumiai, NK)
2.) 匿名組合 (tokumei kumiai, TK)
3.) 投資事業有限責任組合 (tōshi jigyō yūgen sekinin kumiai)
4.) 有限責任事業組合 (yūgen sekinin jigyō kumiai)
5.) 合名会社 (gōmei-kaisha or gōmei-gaisha, GMK)
6.) 合資会社 (gōshi-kaisha or gōshi-gaisha, GSK)

South Korea

1.) 개인 기업 (sa-eopja)

1.) 주식회사 (jusik hoesa)
2.) 유한회사 (yuhan hoesa)
3.) 주식회사 (chusik hoesa)
4.) 유한책임회사 (yuhan chaeg-im hoesa)
1.) 합자회사 (hapja hoesa)
2.) 합명회사 (hapmyeong hoesa)

Mexico

1.) Persona Física 1.) Sociedad Anónima de Capital Variable (S.A de C.V.)
2.) Sociedad de Responsabilidad Limitada de Capital Variable (S de R.L. de C.V.)
3.) Sociedad por Acciones Simplificada (SAS)
4.) Sociedad Anónima Promotora de Inversión (SAPI)
5.) Sociedad Financiera de Objeto Múltiple (SOFOM)
1.) Sociedad en Comandita Simple (S. en C.)
2.) Sociedad en Comandita por Acciones (S. en C. por A.)

New Zealand

1.) Sole trader 1.) Limited Liability Company (Limited, Ltd., or Tapui)
2.) Unlimited companies (these are rare)
1.) Partnership

Norway

1.) Enkeltpersonforetak (ENK) 1.) Aksjeselskap (AS)
2.) Allmennaksjeselskap (ASA)
3.) Selskap med begrenset ansvar (BA)
1.) Ansvarlig selskap (ANS)
2.) Selskap med delt ansvar (DA)
3.) Kommandittselskap (KS)

Philippines

1.) Sole trader/self employed

1.) Corporation (Corp.)
2.) Enterprise (Ent.)
3.) Incorporated (Inc.)
4.) Company (Co.)
1.) General Partnership (Co.)
2.) Limited Partnership (Ltd. (Limited), Ltd. Co.)

Poland

1.) jednoosobowa działalność gospodarcza 1.) Spółka z ograniczoną odpowiedzialnością (Sp. z o.o.)
2.) Spółka akcyjna (S. A.)
1.) Spółka Jawna (Sp.J.)
2.) Spółka Komandytowa (Sp. K.)
3.) Spółka Komandytowo-Akcyjna (S.K.A.)
4.) Spółka Partnerska (Sp.P.)

Saudi Arabia

1.) The Establishment 1.) Joint Stock Company (JSC)
2.) Limited Liability Company (LLC)
1.) Joint Liability Company
2.) Limited Partnership Company

Singapore

1.) Sole Trader 1.) Private Limited Company (Pte. Ltd.)
2.) Public Limited Company (Ltd.)
3.) Exempt Private Company (Pte. Ltd.)
1.) Limited Liability Partnership (LLP)
2.) Limited Partnership (LP)
3.) General Partnership (GP)

South Africa

1.) Sole proprietorship/Alleeneienaar 1.) Private Company (Pty.) Ltd.
2.) Public Company (Ltd.)
3.) Personal Liability Company (Inc.)
4.) Non-profit company (NPC)
5.) Free Zone Company (IDZ Pty. Ltd.)

1.) Partnership/Vennootskap

* the commercial registrar does not allow registration 
of partnership as legal entity in South Africa.

Spain

1.) Empresario Individual or Autónomo 1.) Sociedad Anónima (S.A.)
2.) Sociedad de Responsabilidad Limitada (S.L.)
3.) Sociedad Limitada Nueva Empresa (S.L.N.E.) 
4.) Sociedad de Responsabilidad Limitada (S.R.L.)
5.) Pequeñas Y Medianas Empresas (PYME)
6.) Sociedad Anónima Laboral (SAL)

1.) Sociedad Civil Privada (S.C.P.)
2.) Sociedad Colectiva (S.C.)
3.) Sociedad Comanditaria (S.Cra.) 

Sweden

1.) Enskild firma  

Aktiebolag/
Corporation/
Form 5471

1.) Handelsbolag (HB)
 2.) Kommanditbolag (KB)
 3.) Enkelt bolag

Switzerland

1.) Einzelunternehmen
 2.) Raison Individuelle (RI) 

1.) Aktien gesellschaft (AG)
 2.) Société Anonyme (SA)
 3.) Gesellschaft mit beschränkter Haftung (GmbH) 4.) Société à Responsabilité Limitée (SARL)
 5.) Società a Garanzia Limitata (SAGL)

1.) einfache Gesellschaft (eG) 2.) Kollektivgesellschaft (KG) 3.) Kollektivgesellschaft (KolG) 4.) Société en Nom Collectif (SNC)
 5.) Société en commandite (SC)
6.) Société en Commandite par Actions (SCA)

Thailand

  1.) Sole Trader - ผู้ซื้อขาย แต่เพียงผู้เดียว
 2.) Self Employed - ทำงานให้ตัวเอง 

*Under the United States-Thailand Treaty of Amity and Economic Co-operation, foreigners may not run sole proprietorships. 

1.) Private Limited Company - บริษัทเอกชนจำกัด 
2.) Public Limited Company - บริษัทจำกัดมหาชน

1.) Limited Partnership - ห้างหุ้นส่วนจำกัด 
2.) Unregistered Ordinary Partnership - ห้างหุ้นส่วนสามัญที่ไม่ได้จดทะเบียน 
3.) Registered Ordinary Partnership - ห้างหุ้นส่วนสามัญที่ลงทะเบียน

UAE

1.) The Establishment

1.) Limited Liability Company (LLC)
 2.) Private Shareholding Company (PJSC)  
3.) Public Shareholding Company (PJSC)
4.) Free Zone Company (FTZ) 

1.) General Partnership
2.) Limited Partnership

UK

1.) Sole Trader

1.) Private Limited Company (LTD) 2.) Public Limited Company (PLC) 3.) Unlimited company (Unltd., or Ultd.)
 4) Limited Liability Partnership (LLP)

1.) Limited Partnership (LP)
 2.) General Partnership
 3.) Scottish Limited Partnership

 

2. Wow - I had no idea that this was so complicated, is it worth it to keep my corporation?

That depends. Although a non-US corporation may raise your U.S tax filing requirements, it may be very beneficial to your bottom line due to tax deferral. In an oversimplified example for the sake of getting the point across:

- If your corporation earns 500K in Singapore, and you pay yourself $100 salary, with $400K remaining as retained earnings, you will likely pay 0 tax as an individual, and the undistributed earnings will remain untaxed in your corporation so you can reinvest in your business.

- If you were a Sole Proprietor (EI) and earned $500K, you would not be allowed to defer income recognition and quite likely generate significant tax due.

Please review our Non-US Offshore Corporation Guide for more in depth analysis of the pros and cons of incorporating abroad.

3. What if I choose not to file these forms?

Whether or not you choose to play russian roulette with Uncle Sam is up to you, but it is our job to make you aware of the requirements. Failure to file corresponding forms carries heavy fines.

The penalty under IRC Section 6038(b)(1) is $10,000 for each late or incomplete Form 5471. If the IRS notifies you and you fail to respond accordingly within 90 days, an additional $10,000 penalty will apply for each 30-day period. The additional penalty is limited to a maximum of $50,000.

 

4. I have failed to declare my business but I am up to date with my U.S tax returns - how can I get caught up? Can I somehow avoid penalties?

The IRS realizes that this system is quite complex, and not everyone is a secret Rockefeller trying to hide millions abroad. There are specific programs in place to allow you to get compliant on your non-US business filing requirements while providing for amnesty from penalties.

- There is a special program for this - the Delinquent Informational Return Program. Examples of informational returns are 5471 (foreign corporation), 3520-A (foreign trust)

- Participating in this program would entail 3 amended returns for each of the past 3 years (assuming you are up to date with your returns but have not filed the informational return for all three years), and Forms 5471 (assuming that is the missing form) for each year. Finally, a reasonable cause statement must be attached.

- Potential for filing FATCA (Form 8938) if the balance on the company accounts (previously unreported) puts the taxpayer over the threshold.

5. What if I have not filed any U.S tax returns and non-US corporation returns?

Similar to the above process there is a program in place for this as well - you would file via the Streamlined Procedure and include the informational forms (5471, 8865, 3520, 3520-A, etc) as part of your submission. This all inclusive package would get you back into the good graces of the IRS without any penalties.

6. What if I want to expatriate, do I have to go declare these forms on my final tax returns?

As part of the expatriation (whether you are relinquishing citizenship, or renouncing your GC as a long term GC holder) process, you must certify that you are complaint with US tax returns for the last 5 years.

Final and important note - if your tax returns had to include forms related to your ownership of non-US business but you had failed to file them, your returns are incomplete and you would be making a false claim in saying so on form 8854.

Ines Zemelman, EA
founder of Taxes for Expats