Form 1120-F Instructions for Foreign Corporations

Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, is used to report income from U.S. sources and calculate a corporation’s final tax liability for a given tax year. The form is used for reporting all income, claiming applicable deductions and tax credits, and requesting refunds for overpaid taxes. It is also the instrument for calculating specific obligations like the branch profits tax.

Determining Filing Requirements

A foreign corporation must file Form 1120-F if it is “engaged in a trade or business in the United States” (USTB) during the tax year. The determination of USTB relies on an analysis of the corporation’s economic activity, which must be “considerable, continuous, and regular.” This can include maintaining a factory or office in the U.S. or having a U.S.-based agent who regularly concludes contracts on the corporation’s behalf.

A foreign corporation must also file if it has U.S. source income and its tax liability was not fully paid through withholding at the source. This applies to Fixed, Determinable, Annual, or Periodical (FDAP) income, which can include interest, dividends, rents, and royalties. If the correct tax amount was not withheld by the payer, the corporation must file Form 1120-F to report the income and pay the tax due.

A corporation should consider filing a “protective” Form 1120-F even if it believes it has no net income or is exempt from U.S. tax because of a tax treaty. Filing a protective return secures the right to claim deductions and credits against its income if the IRS later determines the corporation has a U.S. tax liability. Without a timely filed return, the corporation could be taxed on its gross income without any allowances for expenses or treaty benefits. This is a strategic measure to preserve future rights while asserting a current belief of no tax liability.

Information and Documentation Needed to File

A corporation must have an Employer Identification Number (EIN) to file Form 1120-F. The EIN serves as the corporation’s tax identification number. If the corporation does not have an EIN, it must apply for one using Form SS-4, Application for Employer Identification Number, before the return can be processed.

The corporation must segregate its financial records to distinguish between income “Effectively Connected with a U.S. Trade or Business” (ECI) and other income, like FDAP. ECI is income attributable to the corporation’s U.S. operations and is taxed on a net basis, while non-ECI is taxed on a gross basis through withholding. This requires detailed accounting records and financial statements that can be reconciled with U.S. tax principles.

Comprehensive documentation is required to substantiate any claimed deductions against ECI. This includes records for expenses such as salaries paid to U.S. employees, rent for office space, and other operational costs. Without proper documentation, these deductions may be disallowed. Any tax credits the corporation plans to claim must also be supported by the relevant forms and calculations.

Information is also needed for calculating potential additional taxes, such as the Branch Profits Tax and the tax on excess interest. This involves analyzing the corporation’s U.S. net equity and the interest deducted on the U.S. return. Preparing required schedules, such as the one for interest expense allocation, requires a detailed breakdown of the corporation’s worldwide assets and liabilities.

Completing Form 1120-F Section by Section

Page one of Form 1120-F requires basic corporate information, including the corporation’s name, foreign address, and Employer Identification Number (EIN). The filer must also indicate the relevant tax year. This initial section culminates in the final calculation of tax due or the overpayment to be refunded.

Section I

Section I is for reporting income from U.S. sources that is not effectively connected with a U.S. trade or business. This category consists of FDAP income, such as interest, dividends, rents, and royalties. For each type of income, the corporation reports the gross amount received and the corresponding amount of U.S. tax withheld at the source.

Section II

Section II is the most detailed part of the return and determines the taxable income that is effectively connected with a U.S. trade or business (ECI). It begins with reporting gross ECI, followed by a comprehensive list of allowable deductions. Corporations enter expenses such as compensation of officers, salaries and wages, rent, and taxes, with interest expense being calculated on the attached Schedule I.

After listing all applicable deductions, the total is subtracted from gross ECI to arrive at taxable income before net operating loss and special deductions. The tax is then computed on this income using the applicable corporate tax rates. This section also provides lines for claiming various tax credits, such as the foreign tax credit detailed on Form 1118, to find the net tax liability on ECI.

Section III

Section III addresses the Branch Profits Tax and the tax on excess interest, which are unique to foreign corporations operating in the U.S. The Branch Profits Tax is an additional tax on the profits of a U.S. branch that are deemed to be repatriated to the foreign parent company. Its calculation involves determining the corporation’s “dividend equivalent amount,” which is based on the change in the corporation’s U.S. net equity during the year.

The second part of this section calculates the tax on excess interest. This tax applies if the amount of interest expense deducted on the U.S. tax return exceeds the amount of interest actually paid by the U.S. branch. This “excess interest” is treated as if it were paid by a domestic corporation to the foreign parent and is subject to a 30% tax, unless reduced by a tax treaty.

Required Schedules and Attachments

Filing Form 1120-F often requires attaching various schedules and additional forms to provide detailed calculations and disclosures. The specific attachments depend on the corporation’s particular circumstances and activities. Failure to include a required schedule can result in an incomplete return and potential penalties.

Commonly required attachments include:

• Schedule I (Form 1120-F) is used to determine the amount of interest expense that can be deducted against the corporation’s effectively connected income under Regulations Section 1.882. The calculation analyzes the corporation’s U.S. assets and its worldwide liabilities and interest expense.
• Schedule M-3 (Form 1120-F) reconciles the corporation’s financial accounting income or loss with the taxable income reported on the tax return. Its purpose is to increase transparency by detailing the differences between book and tax income, and it is required for corporations with total assets of $10 million or more.
• Form 8833, Treaty-Based Return Position Disclosure, must be filed if a corporation is taking a position that a U.S. tax treaty overrules or modifies a provision of the Internal Revenue Code under Section 6114. This form explains the basis for the treaty claim.
• Schedule P (Form 1120-F), List of Foreign Partner Interests in Partnerships, is used to identify the corporation’s partnership interests and reconcile its share of partnership income that is effectively connected with a U.S. trade or business.

Filing and Post-Filing Procedures

The filing deadline for Form 1120-F depends on whether the foreign corporation maintains an office or place of business in the United States. If a U.S. office exists, the return is due by the 15th day of the fourth month following the close of the corporation’s tax year (April 15 for calendar-year corporations). A foreign corporation without a U.S. office has until the 15th day of the sixth month after its tax year ends to file. However, an exception applies to corporations with a fiscal tax year ending on June 30, as they must file by the 15th day of the third month after their tax year ends, regardless of whether they have a U.S. office.

A corporation can request an automatic six-month extension by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns. This form must be submitted by the original due date of the tax return. An extension of time to file is not an extension of time to pay; any tax estimated to be due must still be paid by the original deadline to avoid penalties and interest.

Corporations can submit Form 1120-F either by mail or electronically. The IRS instructions for the form provide the specific mailing addresses. Corporations must e-file Form 1120-F if they file 10 or more returns of any type, including income tax and information returns, during the calendar year. The Electronic Federal Tax Payment System (EFTPS) is the primary method for making federal tax payments.

After the return is filed, the corporation should maintain a copy for its records. The corporation may later receive notices from the IRS requesting additional information or proposing adjustments to the tax liability. It is important to respond to any such notices promptly.