U.S. TAXATION OF U.S. SHAREHOLDERS OF FOREIGN CORPORATIONS
Foreign corporations are generally only subject to tax in the United States if they have business activities in the United States or if they receive income from U.S.-sources. U.S. citizens and residents, however, are subject to tax in the United States on all income they receive as shareholders from foreign corporations. Not only dividends are taxable. The foreign corporation may qualify as a ‘Controlled Foreign Corporation’ (“CFC”) or as a ‘Passive Foreign Investment Company’ (“PFIC”). If the foreign corporation is a CFC or PFIC, the U.S. shareholder may be subject to certain reporting obligations. As such, he may be required to file additional forms as part of his U.S. individual income tax return, Form 1040. There are substantial penalties for failure to file these forms.
Dividends from Foreign Corporations
Dividends received from foreign corporation are taxable and should be reported on Form 1040, Schedule B. The Internal Revenue Code classifies dividends as either ordinary or qualified. Ordinary dividends are taxable as ordinary income. Qualified dividends that meet certain requirements are taxed at lower capital gain rates. Dividends received from a qualified foreign corporation are qualified dividends. A foreign corporation is a qualified foreign corporation if it is eligible for the benefits of a income tax treaty with the United States that is included on this list.
U.S. Shareholders of Foreign Corporations: Form 5471
You may have to file Form 5471 if, in 2019, you were an officer or director of a foreign corporation. You may also have to file Form 5471 if you owned 10% or more of the total value of the foreign corporation’s stock or voting power. The IRS requires more detailed information if a U.S. shareholder is considered to have control of a foreign corporation. A U.S. shareholder is considered to have control of a foreign corporation if, at any time during the tax year, he owns more than 50% of the value of the foreign corporation’s shares or voting power. A foreign corporation controlled by a U.S. shareholder is a CFC.
In addition to Form 5471, U.S. shareholders of a CFC may be required to file Form 8992 with their Form 1040 to determine income exclusions under section 951A (‘Global Intangible Low-Taxed Income’ or “GILTI”).
U.S. Shareholders of Foreign Corporations: Form 8621
A foreign corporation is a ‘Passive Foreign Investment Company’ (“PFIC”) if either 75% or more of the corporation’s income is passive income or at least 50% of its assets are assets that produce passive income. A separate Form 8621 must be filed with the U.S. shareholder’s Form 1040 for each PFIC. Unless an election is made, U.S. shareholders of a PFIC are subject to tax at a punitive rate when they receive distributions that are defined as ‘excess distributions’.
A U.S. shareholder of a foreign corporation that is a CFC and also a PFIC generally will not be subject to the PFIC provisions.
Questions about reporting income from foreign corporations?
Sander US Tax Services specializes in the preparation of U.S. tax returns with foreign income and foreign assets, including U.S. tax returns for U.S. shareholders of foreign corporations. We have offices in Denver, Colorado, as well as Germany, Switzerland, and the Netherlands. Contact us with any questions you may have about reporting your foreign income and foreign assets on your U.S. tax return.