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Foreign Corporation from a US tax perspective

A foreign corporation is generally defined as a business organization that operates outside of the country in which it was formed.

How do I file my US tax return when I’m a shareholder of a Foreign Corporation in the UAE?

It depends on the percentage of shares that you own and if any of your immediate family members are also shareholders.

What are the ownership and filing requirements for a foreign corporation?

The extent of your ownership in a foreign corporation dictates your filing requirements with the IRS.

Let’s look at a scenario, let’s say you own 25% of a company that as setup in Dubai, with the remaining 75% owned by non-US individuals. You’re required to file Form 5471 with the IRS.

Why? Because whenever you own 10% or more of a non-US corporation, the IRS requires you to report financial information about the corporation.

What form would I need to file as a partial owner of a foreign corporation?

In the case of owning 10% or more of a foreign corporation, you must file Form 5471. This form includes details like the corporation’s address, share details and financial performance.

What if I own more than 50% of the corporation?
The situation becomes more complex if a US individual or a group of US shareholders own more than 50% of the corporation. This level of ownership classifies the corporation as a Controlled Foreign Corporation (CFC), triggering different tax implications.

If the corporation is a CFC, US shareholders are taxed on the entity’s net income, based on their shareholding percentage. This tax applies even if the profits are not distributed and remain within the company.

I’m planning to create a foreign corporation, what should I do?

Before establishing a foreign corporation, It’s highly recommended for US individuals or green card holders to seek professional tax advice before setting up a foreign corporation. Tax professionals can provide tailored advice based on your specific situation, plans, and questions.

What are the important points I need to remember as a US shareholder for a foreign corporation?

  • Understand Your Obligations: Familiarize yourself with the filing requirements based on your ownership percentage.
  • Be Aware of CFC Rules: Recognize how the Controlled Foreign Corporation status affects your tax situation.
  • Consult Experts: Due to the complexity of these tax rules, consulting with a tax advisor is essential to ensure compliance and optimize your tax position.

Why partner with a specialist Expat accountant?

Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in the UAE. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.

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