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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
10-Feb-17

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

Business Type 1

Business Type 2

Business Type 3

Business Type 4

Australia

Sole trader/Sch C

 

LTD (Limited Proprietary)
Form 5471

Pty. (Unlimited Proprietary) Partnership/Form 8865

Pty. Ltd. (Proprietary Limited Company): Form 5471

Austria

Einzelunternehmen/Sole/
Sch C

GmbH/LLC/
Form 5471

Aktiengesellschaft (AG)/
Form 5471

OG or KG/Partnership/
Form 8865

Belgium

Eenmanszaak
or Entreprise individuelle/
Sch C

SPRL or EBVBA or BVBA/LLC/
Form 5471

VOF or SEP or SCS/Partnership/Form 8865

NV or SA (societé anonyme)/Corporation/
Form 5471

Brazil

Empresa individual (firma individual)/
Sch C

Ltda or SA or EIRELI or Micro empreendedor individual/LLC/
Form 5471

Any ‘Sociedade’ other than SA or LTDA/
Partnership/
Form 8865

 

Canada

SP (Sole Proprietorship)/Sch C

Corporation/
Form 5471

GP or LP/
Partnership/
Form 8865

 

Czech Republic

s.r.o /LLC/
Form 5471

a.s/Corporation/Form 5471

v.o.s./
Partnership/
Form 8865

pobočka/Branch of Foreign Company/
Form 5471

Chile

Associación/Independent member/Sch C

 

sociedad colectiva OR sociedad limitada/
Partnership/
Form 8865

 

China

 

股份有限公司: /Corporation/
Form 5471

有限公司:/
Partnership/
Form 8865

 

Costa Rica

 

SA or SRL/Corporation/Form 5471

 

 

Denmark

Enkeltmandsvirksomhed: sole proprietorship/
Sch C

IVS or ApS or S.M.B.A/Corporation/Form 5471

K/S or P/S or I/S – Partnership/
Form 8865

 

France

EI/Sole Proprietorship/
Sch C

EURL or SASU or SA/Corporation/Form 5471

SEP or SNC or SCS or SCA/
Partnership/
Form 8865

 

Germany

GmbH/LLC/Form 5471

AG/Corporation/Form 5471

OHG or KG/
Partnership/
Form 8865

Zweigniederlassung /Branch/
Form 5471

Hong Kong

 

有限公司/Corporation/
Form 5471

無限公司/Partnership/Form 8865

 

Ireland

Freelance OR sole-trader/
Sch C

LTD/
Corporation/
Form 5471

Unlimited Company OR Partnership/
Form 8865

 

Italy

Imprenditore/
Sole Proprietorship/
Sch C

Società di capitali/
Corporation/
Form 5471

Società di persone/
Partnership/
Form 8865

 

Japan

 

KK or GK/
Corporation/
Form 5471

GMK or GSK or NK or TK/
Partnership/
Form 8865

 

South Korea

 

jusik hoesa OR yuhan hoesa/
Corporation/
Form 5471

hapja hoesa OR hapmyeong hoesa/
Partnership/
Form 8865

 

Mexico

Persona Física/
Sole Proprietorship/
Sch C

SA or S. de R.L/Corporation/Form 5471

Sociedad en Nombre Colectivo OR Sociedad en Comandita Simple/
Partnership/
Form 8865

 

New Zealand

Sole Trader/
Sch C

LLC or Cooperative/
Corporation/
Form 5471

Partnership/
Form 8865

LAQC/S-corp/
Form 8865 or 8858

Norway

Enkeltpersonforetak/
Sole proprietorship/

Sch C

ASA or AS/Corporation/Form 5471

ANS or DA/
Partnership/
Form 8865

 

Philippines

 

Corp or Inc or LLC or Ent/
Corporation/
Form 5471

CO or LTD/
Partnership/
Form 8865

 

Poland

jednoosobowa działalność gospodarcza/
Sole proprietorship/
Sch C

SA or Sp. z o.o./
Corporation/
Form 5471

sp.j. OR sp.p OR sp.k/
Partnership/
Form 8865

 

Saudi Arabia

Individual Establishment/Sole Proprietorship/
Sch C

Private Limited Company OR Joint Stock Company/
Corporation/
Form 5471

General Partnership Company OR Limited Partnership/Partnership/
Form 8865

 

Singapore

Sole Proprietorship/
Sch C

Ltd Bhd or Pte Ltd or Sdn Bhd/
Corporation/
Form 5471

LLP/
Partnership/
Form 8865

 

South Africa

Sole Proprietor/
Sch C

Pty or PLC or NPC/
Corporation/
Form 5471

 

 

Spain

Sole Trader/
Sch C

SL or SLNE or SA/LLC/
Form 5471

sociedad civil/
Partnership/
Form 8865

PYME/
Corporation/
Form 5471

Sweden

Enskild firma/ sole proprietorship/
Sch C

Aktiebolag/
Corporation/
Form 5471

HB or KB or Enkelt bolag/
Partnership/
Form 8865

 

Switzerland

Einzelunternehmen or RI (raison individuelle)/
Sole Proprietorship/
Sch C

AG or SA or SARL or GmbH/
Corporation/
Form 5471

eG or KolG or KG or SNC or SC or LP or GP/
Partnership/
Form 8865

 

Thailand

 

PLC or LTD/Corporation/Form 5471

ห้างหุ้นส่วน/Partnership/Form 8865

 

UAE

Sole Establishment/
Sch C

LLC /
Corporation/
Form 5471

Partnership/
Form 8865

 

UK

Sole proprietorship (Sole traders)/
Sch C

LTD/
Corporation/
Form 5471

General Partnership or LP or LLP/
Partnership/
Form 8865

 

USA

Sole Proprietorship/
Sch C

S-Corporation/
Form 1120-S

Partnership/
Form 1065

LLC/
Sch C if one owner, form 1065 if more than one owner, form 1120 if filed election to be treated as corporation

 

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
Ines Zemelman, EA
founder of Taxes for Expats