Foreign Disregarded Entity Tax Form Filing Requirements
Navigate the tax compliance obligations for a foreign disregarded entity. This guide covers the essential reporting requirements and filing process for U.S. owners.
A foreign disregarded entity (FDE) is a business structure outside the United States that is not considered separate from its owner for U.S. tax purposes. The Internal Revenue Service (IRS) ignores the entity for income tax calculations, and the FDE’s financial activities flow directly to the owner’s tax return. This structure is similar to a sole proprietorship or a branch of the owner’s business.
Even though the entity is “disregarded,” the U.S. owner is responsible for fulfilling all reporting duties related to its activities. This reporting framework provides the IRS with a clear picture of a U.S. person’s foreign financial interests and operations.
Determining Filing Requirements
The obligation to file for an FDE is triggered by specific ownership criteria. A “U.S. person”—a category including U.S. citizens, resident aliens, domestic corporations, and certain trusts—has a filing requirement if they are the tax owner of an FDE.
The concept of “tax ownership” is central, as the tax owner is the entity treated as owning the FDE’s assets for U.S. tax purposes, which is not always the same as the legal owner. For example, a U.S. person can elect to have a foreign corporation treated as a disregarded entity by filing Form 8832, Entity Classification Election.
The filing requirement also extends to a U.S. person who owns a controlling interest in a foreign corporation or partnership that is the tax owner of an FDE. In this situation, the U.S. shareholder or partner inherits the filing duty.
Required Information for Form 8858
The primary document for reporting an FDE is Form 8858, the Information Return of U.S. Persons With Respect to Foreign Disregarded Entities. Preparing this form requires gathering detailed financial and operational data about the FDE.
General Information
The initial part of the form requires basic identifying details for both the U.S. owner and the FDE. This includes the name, address, and U.S. taxpayer identification number of the person filing. For the FDE, you must provide its name, address, the country where it was established, its Employer Identification Number (EIN), its principal business activity, and its functional currency.
Schedule C (Income Statement)
A significant portion of the preparation involves creating a summary income statement for the FDE on Schedule C. This statement must report the entity’s income and expenses, such as sales revenue and operational costs, for its annual accounting period. The financial data must be prepared in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP).
Schedule F (Balance Sheet)
Schedule F requires a balance sheet that presents the FDE’s assets, liabilities, and owner’s equity at the end of the accounting period. You will need to list all assets, such as cash and property, as well as all liabilities. Like the income statement, this must also conform to U.S. GAAP.
Currency and Accounting Method
All financial figures reported on Form 8858 must be stated in U.S. dollars. If the FDE’s functional currency is not the U.S. dollar, you must translate the amounts using the average exchange rate for the FDE’s tax year. The specific exchange rate used must be reported on the form.
Other Key Schedules
Form 8858 includes several other schedules for specific situations:
- Schedule G asks for information about the FDE’s ownership structure.
- Schedule H is used to report its current earnings and profits, aligning the FDE’s net income with U.S. tax principles.
- Schedule J accounts for foreign income taxes paid or accrued, which is important for claiming foreign tax credits.
- Schedule M is required to detail transactions between the FDE and its U.S. owner or other related parties.
- Schedule C-1 is used by partners in a partnership that owns the FDE to report their specific share of the entity’s income or loss.
The Filing Process for Form 8858
Form 8858 is not a standalone tax return; instead, it must be attached to the U.S. person’s annual income tax return. For an individual, this would be Form 1040, while a corporation uses Form 1120, and a partnership uses Form 1065. The FDE’s information becomes an integral part of the owner’s overall tax filing for the year.
The due date for Form 8858 is the same as the due date for the income tax return to which it is attached, including any approved extensions. The submission method follows the main tax return. If you file electronically, Form 8858 must also be submitted electronically, while paper filers include the form in their mailed package.
Penalties for Non-Compliance
Failing to file Form 8858 on time or providing incomplete information can lead to significant financial penalties under the Internal Revenue Code. The initial penalty for failing to furnish the required information is $10,000 for each annual accounting period of the FDE for which the failure exists. If a U.S. person owns multiple FDEs and fails to file a form for each one, a separate $10,000 penalty can be assessed for each failure.
If the IRS mails a notice of the failure to file, the taxpayer has a 90-day period to provide the required information. If the failure continues after this 90-day period, an additional penalty of $10,000 is imposed for each 30-day period, or fraction thereof, that the failure persists. This continuation penalty is capped at a maximum of $50,000 for each failure.
Beyond the direct monetary penalties, a failure to file Form 8858 can result in a 10% reduction of the foreign taxes available for credit. If the failure continues for more than 90 days after an IRS notice, this reduction can increase. This penalty can substantially increase a taxpayer’s U.S. tax liability by limiting their ability to offset U.S. taxes.