If you are an American with an offshore bank account or company, you will want to know what your reporting and tax obligations are. In this article we will review what those are.
As an American you are obligated to follow the same rules as a domestic investor. This is also the case if foreign legal entity conducts business offshore.
Americans must life an FBAR (Foreign Bank and Financial Account), due by June 30th, if compounded value of accounts exceeds $10k at any time during the year. The form number is TD F 90-22.1.
Not only Americans, but also residents of the U.S. are obligated to fill the form. Reporting of offshore accounts must be filled even when they are not active and they don’t bring income. Not properly filing an FBAR can get you $500k penalty or face up to 10 years in prison and even smallest penalties go up to $10k.
A person who holds the power of attorney, which grants him signature authority on offshore account must report it on FBAR.
You are required to file special tax reports if the company is a personal holding company, controlled foreign corporation or is a passive foreign investment company.
Foreign Personal Holding Company
A corporation is a personal holding company if more than 50% of stocks belongs to no more than five person.
Controlled Foreign Corporation
CFC (Controlled Foreign Corporation) is when Americans own directly or indirectly more than 50% of a company. Shareholders with 10% interest or more must file the form 5471 and personal annual tax form.
If you have a Subpart F income, you are required to report it, even if the company has not distributed profit to the shareholders yet.
What is Subpart F Income? It is a mainly passive income from foreign sources, which is taxable in the U.S. It includes dividends, interests, royalties, rents, annuities… Foreign base company sales income and foreign base company services income.
Substantial assistance includes, but is not limited to, direction, supervision, services, know-how, financial assistance (other than contributions to capital), and equipment, material, or supplies, if such assistance furnishes skills being a principal element in producing the income, or if the assistance constitutes 50% of the service cost. A related person to the company is the one in control of the CFC in possessing more than 50% of stocks.
Subpart F income doesn’t include items from sources in the U.S.
Foreign Passive Investment Companies (PFIC)
A foreign corporation is foreign passive investment company if 75% or above in the gross income is passive income or 50% and above of its assets produce passive income.