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 US shareholders in UAE foreign corporations file taxes?
It depends on the percentage of shares that you own and if any of your immediate family members are also shareholders.
Foreign corporation ownership and filing rules for US taxpayers.
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.
Have a foreign corporation? Let’s check if you have US tax obligations.
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 in the middle east 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.
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Do I need to file a tax return if I live in UAE?
Am I eligible for Foreign Earned Income Exclusion? Learn from Tanveer Mannan, a highly experienced IRS Enrolled Agent based in Dubai. Having worked at EY and PWC before joining EXPAT US TAX, Tanveer has 15 years’ experience of helping Americans get the correct advice when they come to work in UAE. Getting the correct tax […]
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