Foreign corporations face varying tax obligations depending on their level of U.S. business activities and income sources. The IRS requires these entities to file specific forms and pay taxes when they earn income from U.S. sources or engage in trade or business within the United States.
The following filing requirements may be required for foreign corporations:
Form 1120-F is for foreign corporations to report U.S. income, gains, losses, deductions, and to calculate and pay U.S. income tax when involved in U.S. trade or earning U.S. source income. Filing also preserves certain benefits (e.g., deductions, treaty relief).
Generally, a foreign corporation should file Form 1120-F if:
The 15th day of the 4th month following the end of the corporation’s tax year (April 15 for calendar year corporations).
If the corporation does not maintain an office or place of business in the U.S., the deadline is the 15th day of the 6th month following the end of its tax year (June 15 for calendar year corporations).
Form 5472 is an IRS form designed to monitor foreign companies conducting business within the United States, as well as U.S. corporations that have significant foreign ownership.
Form 5472 should be filed when a reporting corporation has entered into reportable transactions with a related party, within a tax year.
Let us understand what constitutes reportable transactions, reporting corporations, and their related parties in the next section.
Generally, a reporting corporation should file Form 5472 if it has a reportable transaction with a foreign or domestic related party. As per the IRS, the following qualify as reporting corporations:
Foreign corporations conducting business in the United States and having reportable transactions with related parties are generally required to file Form 5472.
U.S. businesses that have at least 25% foreign ownership and engage in a reportable transaction should file Form 5472.
According to the IRS, a corporation is considered 25% foreign-owned if it has at least one foreign shareholder, either directly or indirectly, who owns 25% or more at any point during the tax year.
A U.S. disregarded entity (DE) that is entirely owned by a foreign individual or corporation qualifies as a reporting corporation for filing Form 5472.
A “foreign-owned U.S. disregarded entity” refers to a domestic entity that is treated as disregarded for U.S. income tax purposes and is wholly owned by a foreign person. It means that the IRS does not view it as separate from its owner. Instead, all of its income, expenses, and activities are reported as if they belong directly to the foreign owner.
From the above requirements, it is apparent that foreign corporations are also required to file Form 5472 if they engage in a U.S. trade or business to report any reportable transactions with related entities.
Form 5472 requires disclosure of all reportable transactions. Let’s understand what ‘reportable transactions’ are in the context of Form 5472.
Reportable Transactions include any transactions involving the exchange of money or property between the reporting corporation and a related party. This encompasses sales, rents, and other monetary and non-monetary exchanges.
However, only transactions involving related parties, as defined by the IRS, are reportable. Let us now understand who is considered a “related party” in the next section.
Let’s understand what a ‘related party’ in the context of Form 5472 is:
A separate Form 5472 should generally be filed for each related party that is reportable.
Example:
Suppose a French corporation operates in the United States. It pays $500,000 to purchase software licenses from an Indian company that the same French investor owns. In this situation, the French corporation is considered a reporting corporation because it is a foreign-owned entity doing business in the U.S.
The payment to the Indian company is a reportable transaction since it involves a cross-border monetary exchange. And because the same French investor controls the Indian company, the Indian company is treated as a related party. As a result, the French corporation is required to file Form 5472 to disclose this transaction.
Form 5472 due on the same date as the corporation’s income tax return (Form 1120, 1120-F, etc.), including extensions.
Form 5472 is filed as an attachment to the tax return.
There are penalties associated with non-compliance with Form 5472. Usually, this is $25,000 penalty per related party for late, incomplete, or inaccurate filing.
If the failure continues for more than 90 days after IRS notification, an additional $25,000 penalty applies for each 30 days (or part thereof).
The IRS may also treat the failure as an incomplete tax return, potentially invalidating the corporation’s return.
Form 8833 is used to notify the IRS when a foreign corporation is taking a treaty-based return position under an income tax treaty between the U.S. and the country where the foreign corporation is based. This form informs the IRS that the foreign corporation is claiming treaty benefits, which may reduce or eliminate its U.S. tax obligations.
These treaty benefits can include:
Form W-8BEN-E, officially titled “Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities),” is the form that foreign entities (such as corporations, partnerships, and trusts) use—not individuals.
Please be aware that this form differs from the W-8BEN, which is intended for individuals, as explained below.
When a foreign business earns certain types of U.S.-source income (like dividends, royalties, interest, or certain service payments), the U.S. payer or withholding agent is generally required to withhold tax at a flat 30% rate. However, by submitting Form W-8BEN-E, the foreign entity can:
The IRS examines the information submitted to ensure that the foreign entity is not classified as a U.S. taxpayer and to determine if it is eligible for treaty benefits.
If a business does not provide a valid W-8BEN-E, the U.S. payer may withhold the full 30% tax on payments, even if a treaty benefit applies.
Form 7004 allows businesses to request automatic extensions for filing tax returns, including those for partnerships, corporations, and S corporations.
The Form 7004 deadline depends on the business structure and the original due date for its tax return.