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Mail Bag 6 - German Corps, Australian SMSF, French Capital Gains, Foreign Owned LLC, and Unreported ISAs

Mail Bag 6  - German Corps, Australian SMSF, French Capital Gains, Foreign Owned LLC, and Unreported ISAs
Ines Zemelman, EA
08 August 2017

1. German GmbH, UG

I am a US Citizen living in Germany. I am an owner in a GmbH (80% owner), as well as a UG entity (100%) in Germany.

Am I required to file a US Form 5471 in both scenarios? Would the US consider my UG a disregarded entity for tax purposes and therefore I can reported my UG net income on a Schedule C? Or must I file a 5471 instead? I look forward to hearing back from you.

The GmbH is a corporation set up in a foreign country. It would require form 5471 - please review our guide to foreign corporations.

The UG (haftungsbeschränkt) is a simplified version of GmbH that can be founded with a minimum share capital of one Euro. It is still a company with limited liability. Limited Liability means it is not a disregarded entity. UG also required form 5471, however since you only own 20% filing will be simpler and include fewer schedules.

German GmbH, UG

2. Australian SMSF

I'm an AUS/US dual citizen that just moved to Australia. I've never worked here before and I need to set up a super account in the next few days for my employer to contribute to. It seems I should avoid PFICs (ie non US mutual funds)? I'm looking urgently for a super fund that will have the least amount of US implications?

Australian SMSF (Self Managed Super Fund) is not treated as a foreign pension by the IRS. It is a foreign grantor trust. SMSF owner must annually file form 3520-a, whether they receive distributions from the fund or not.

If you want to avoid complicated tax filing in the US it is better to stay away from SMSF. Whereas employer-sponsored Superannuation is recognized as foreign pension plan. You will not be required to report PFIC holdings inside the plan. However, employer contributions to the plan need to be added to your annual taxable earnings in the US. From the IRS prospective this is a part of your compensation not allowed for deferral. When you start drawing money from the fund the distributions will be virtually non-taxable to you because your own contributions and employer contributions have been taxed while you earned. Annual growth in the plan may be taxable too if you meet certain income criteria.

Australian SMSF

3. Capital Gains

I have capital gains from stocks sold last year. They are called non-covered transactions by my broker and include 10 purchases including transfers from my late father. How do i obtain cost basis for these stocks?

If you do not have accurate records, please look up the dates of purchases and you can track the price the day of the the transaction on It is very important to do so, as you are establishing the "cost"; in absence of info the IRS will treat your cost as 0 -- certainly not a desired outcome.

Capital Gains

4. French Brokerage

Does a US citizen resident in France with a French brokerage account earning money on shares in American companies pay taxes in the US or France on those profits?

A US citizen, resident anywhere in the world, must pay US tax on capital gains, if any.

Now - they won't pay double tax, if their returns are prepared correctly, but they are not exempt from paying US tax. If they already paid french tax on those gains, they would not pay the duplicate tax in the US. Tax paid in France will be applied as a foreign tax credit towards the US tax on the same income.

French Brokerage

5. Filing Requirements

I'm right now advising my son, living in Europe, on filing tax returns once his income exceeds $10,350.I notice that there is no tax penalty for late filing or no filing if no tax is due.

Since foreign income inclusion negates any tax owed for forseeable future, and if he gets very wealthy, Swedish tax is still much higher than US tax . . . it would appear he would never owe any US tax.

Am I missing something? He must file, but if he doesn't owe taxes there is no financial penalty or other penalty if he doesn't. So nothing government can do. Seem like horrendous extra work to file taxes in a second country an entire life without owing anything, if living overseas.

Not exactly. You don't get an exemption to get tax due to 0, until you file. Secondly, if the IRS contacts you, they don't start off with the premise that you owe 0 tax, and generally prepare a return for you under far worse premises from which you need to claw back from. Of course, should you be successful, you would owe no money, but the entire process is miserable.

Moreover, once the aggregated balance on non-US financial accounts reaches $10K those accounts must be reported to the IRS. Failure to report will cause penalties, although those reports do not have any tax associated - they are purely informational.

But - this is all noise - the fact of the matter is that it's the law - and that's all we can advise you of. However you proceed further is always your choice.

Filing Requirements

6. Foreign owned LLC

I am a Chinese citizen and live in China. I registered an one-man LLC company in the US as a disregarded entity. It offers online services. Since it creation, it has been operating at a loss all along. The monthly sales are below $500 USD, and the monthly expenses are above $700 USD. I hope to find a reliable service to file taxes. Recently I heard the new policy for the IRS Form 5472, and I want to know if you can file the form to the IRS.

If single member LLC, this would require filing Sch. C - $100 in addition to the cost of filing federal tax return form 1040 or 1040NR. After analyzing your completed tax questionnaire and reviewing your documents, we will send you an engagement letter outlining services and pricing.

Starting next year, additional requirements are coming to the forefront. Foreign owned LLCs will be required to obtain an EIN (tax ID number for a business), and you will have to file form 5472 (as you have alluded). As far as your personal requirements - you will have to obtain a personal ITIN number, file form 1040NR and possibly a state tax return - depending on the state of LLC creation. Of course, we can assist you with all of these aspects (except for EIN - you can just fill this out on the IRS website)

Foreign owned LLC

7. State Taxation

I am an American citizen who has been living the Netherlands for almost 4.5 years. I have been filing my federal and state (North Carolina) returns ever since I moved here in 2013. However, my parents moved to Georgia back in December 2016 and I am curious, since I have no ties with NC - do I still need to file state taxes there or can I switch to Georgia somehow (and would this require me to transfer residency)?

First and foremost, during tax preparation we will analyze your state tax residency position to verify whether you qualify as a non-resident of the state where you lived before expatriation. If you use NC as a mailing address on your federal return it is not likely that you may be exempt from filing as a state resident.

To change to the state in which you are filing, you would first need to establish a mailing address in a different state and use it on your federal tax return. It can be address of your family living in a different U.S. state. With Georgia being your new state of domicile, you will be allowed not to file tax return. If you receive income from that state then you will be allowed to file the non-resident tax return and only report income from the state sources.

State Taxation

8. Unreported ISA

I previously filed via the SP program and file annually including FBARs. At the time of filing under the procedure I had completely forgotten about a stocks and shares ISA I had opened before I started the original process (it was a £200 a month standing payment that I made and never received any dividends on). I closed the ISA last year October but had rolled it into my existing cash ISA (which I had reported on) so thought that was sufficient as the money was accounted for. I now think that I actually need to do several years of back filing to both notify the US of the ISA and pay any possible taxes on it. The total value of my investment was low (£11,000 total) and I received about £1000 in interest total at closure. The investment was open from March 2012 to October 2016. In addition to the ISA, I asked about my pension and they didn't seem to think it was necessary to file it because I was not claiming any income on it yet, but I now think that because my company has been contributing to my pension as well that I should declared this but I don't know how to go about it. I have not purposefully tried to hide anything but am now worried that even though it was a very small amount I have a tax liability I didn't know about because I thought all my earnings fell under the Foreign Tax Credit limits.
I have contacted the company I held the Stocks and Shares ISA with and my pension company and asked for full records of all my holdings for the life of both accounts. What forms do I need to complete and can I resolve this through an amendment to my last 5 years tax forms?

You needed to report your ISA on your FBAR/FATCA. If there was interest (1000 gbp over 4 years from your email) - this needed to be reported on your form 1040 as this was unreported income.
If your ISA had OEICS - this becomes more complicated and requires PFIC reporting.

Now - next steps:

  • To be fully compliant, you should file amended tax returns to report the unreported income, and you should file re-file your FBARs to include any unreported accounts.
  • A proactive, yet less compliant task, would be to re-file the FBARs to declare all accounts, but not amend the tax returns. This opens you up for the possibility of being contacted for unreported income, but it is a small amount, and the filing costs of refiling amended returns for those 3 years may shift the risk-reward against doing it.

I recommend to definitely re-file the FBARs. To be fully compliant you should also amend the tax returns, but please note comments above.

Unreported ISA

Ines Zemelman, EA
Founder of TFX