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u.s. expat tax guide – mexico

Do I have to report my Mexican business to the IRS?

If you own more than 10% of a business in Mexico, you need to file Form 5471 with the IRS. This applies whether it’s a Mexican LLC (S. de R.L.) or a stock corporation (S.A. de C.V.). 

The form reports company details like income, profit, and balance sheets to the IRS. If your ownership is less than 10%, you’re off the hook for Form 5471—but make sure you stay updated on changes to ownership.

When is Form 5471 mandatory?

You must submit Form 5471 if you’re a significant shareholder, director, or officer of a foreign corporation where US persons own more than 50%. These corporations are known as Controlled Foreign Corporations (CFCs)

When a CFC applies, you’ll also need to provide more detailed financial information, including the company’s earnings, profits, and balance sheets.

Why does being a Controlled Foreign Corporation (CFC) matter?

A CFC is any foreign company where US shareholders own over 50% of the shares. 

If your Mexican company qualifies as a CFC, it brings more filing requirements like reporting Subpart F income, which includes passive income (such as dividends, royalties, and rents).

What’s the deal with Subpart F income?

Subpart F income is considered “immediately taxable,” meaning US shareholders must pay tax on it in the year it’s earned, even if it hasn’t been distributed. 

This includes passive income such as dividends and interest. It’s a way for the IRS to ensure certain types of earnings from CFCs are taxed.

Can I use Mexican corporate taxes to lower my US taxes?

Yes. Any corporate tax you pay in Mexico can help reduce your US tax liability under the Foreign Tax Credit (FTC). This credit offsets double taxation, allowing you to subtract the taxes paid in Mexico from the amount you owe to the IRS for the same income.

Will splitting ownership with my spouse lower reporting requirements?

Unfortunately, no. Even if you try to split business ownership with your non-US spouse, the IRS looks at constructive ownership rules, which consider your family’s combined ownership. This means that you’ll still need to file Form 5471, regardless of how you divide shares between family members.

Can transferring shares to a relative help?

No. Transferring shares to a family member won’t eliminate your IRS filing obligations. Under constructive ownership rules, shares held by related parties (like children or spouses) count as part of your ownership, meaning you’ll still need to file Form 5471.

Is it possible to avoid filing Form 5471?

Yes, if you elect to reclassify your Mexican company as a disregarded entity or sole proprietorship for US tax purposes. 

In this case, you’d no longer have to deal with Form 5471 and could simply report your business income on Schedule C of your US tax return. You’ll need to file Form 8832 to officially make this change.

How does reclassification affect my taxes?

Reclassifying your business as a sole proprietorship means its income is considered self-employment income and reported directly on your personal tax return. This might increase your personal taxes but simplifies reporting since Form 5471 is no longer needed. 

Plus, under the US-Mexico Totalization Agreement, your contributions to Mexico’s social security system can exempt you from paying US self-employment tax.

Can married couples reclassify a jointly owned business?

No, only businesses owned by one person can be reclassified as a sole proprietorship. If you and your spouse both own the business, it cannot be treated as a sole proprietorship for tax purposes, meaning you’ll still need to file Form 5471 for joint ownership.

How do you officially reclassify your business?

To reclassify your business, you’ll need to file Form 8832 with the IRS, requesting that your Mexican company be treated as a disregarded entity. Once the IRS approves this change, you can report your business income as part of your individual tax return.

Should I seek help when reclassifying my business?

Yes, reclassifying a foreign business can be tricky, and mistakes can lead to penalties or issues with the IRS. Working with a tax professional who understands international tax laws can make the process smoother and ensure you comply with US regulations.

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