What Is Form 1120-F and Who Is Required to File It?

Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, is the tax document used by corporations established outside the United States to report their U.S.-based financial activities to the Internal Revenue Service (IRS). The form allows these entities to disclose income from U.S. sources, claim allowable deductions and credits, and calculate their U.S. income tax liability. Filing this form is a matter of legal compliance for foreign corporations with certain levels of U.S. activity, ensuring they meet their tax obligations on profits generated within the country.

Determining Filing Requirements

A foreign corporation’s obligation to file Form 1120-F is triggered by being “engaged in a trade or business in the United States” (ETBUS). This is a factual determination. Activities that are considerable, continuous, and regular within the U.S. meet this standard, such as having a factory, a sales office, or employees operating in the country.

The type of income earned is also a determining factor. The filing requirement applies if the corporation has income “effectively connected” with its U.S. trade or business, known as Effectively Connected Income (ECI). ECI is U.S.-source income directly linked to the corporation’s business operations in the United States and is taxed at the regular U.S. corporate income tax rate. This includes revenue from product sales, services performed in the U.S., or income from a U.S. partnership.

A separate category of income that can create a filing obligation is Fixed, Determinable, Annual, or Periodical (FDAP) income. FDAP is passive income, such as interest, dividends, rents, and royalties, from U.S. sources that is not connected to a U.S. business. This income is subject to a flat 30% withholding tax, and a filing may be necessary even if the tax is fully paid through withholding.

Even if a foreign corporation has no net income or tax liability, filing a “protective return” is advisable. A protective Form 1120-F secures the right to claim deductions and credits if the IRS later determines the corporation had taxable income. Failure to file a timely return can result in the permanent loss of these benefits, meaning any determined income could be taxed on a gross basis.

Information and Schedules for Form 1120-F

A corporation must gather identifying information, including its U.S. Employer Identification Number (EIN), principal business activity code, country and date of incorporation, and its accounting method (cash or accrual).

Section I (ECI)

This section is where the corporation reports income that is effectively connected with a U.S. trade or business. To complete it, the filer needs a detailed income statement for its U.S. operations, including gross receipts, cost of goods sold, and operational expenses. The result of this calculation is the corporation’s taxable income from its U.S. business activities.

Section II (FDAP Income)

Section II is dedicated to reporting gross income from U.S. sources that is not effectively connected with a U.S. trade or business. The corporation must list the gross amounts of items like dividends, interest, and royalties from U.S. sources. The total of this income is subject to a separate tax calculation.

Schedule I (Interest Expense Allocation)

Foreign corporations with ECI can deduct a portion of their worldwide interest expense. Schedule I, following the rules of Treasury Regulations Section 1.882-5, guides this complex allocation. To complete this schedule, the corporation must gather data on its worldwide assets and liabilities, valued on a U.S. tax basis. It will need to determine the value of its U.S. assets and compare this to its U.S.-booked liabilities to calculate the allocable interest expense deduction.

Schedule M-3 (Net Income Reconciliation)

Corporations with total assets of $10 million or more at the end of the tax year are required to file Schedule M-3. This schedule reconciles the corporation’s financial accounting net income from its worldwide books with the taxable income reported on Form 1120-F. Filers will need their consolidated financial statements and must identify and quantify the differences between book income and tax income, such as those arising from depreciation, bad debts, and various reserves.

Calculating the Tax Liability

The primary tax is on the corporation’s Effectively Connected Income (ECI), the net profit from its U.S. business operations. This income is subject to the 21% corporate income tax rate after all allowable deductions, including the allocated interest expense from Schedule I, have been subtracted.

An additional branch profits tax may apply. This tax is intended to approximate the withholding tax that would have been paid on dividends if the U.S. operations had been conducted through a separate U.S. subsidiary. The tax is 30% of the “dividend equivalent amount,” which represents the earnings from the U.S. branch that are not reinvested in its U.S. assets. This tax is in addition to the regular corporate income tax on ECI.

The tax on U.S.-sourced FDAP income, reported in Section II, is calculated differently. This passive income is not subject to deductions and is taxed at a flat 30% rate on the gross amount. This tax is collected through withholding by the U.S. payer of the income. The foreign corporation reports this income and the tax withheld on Form 1120-F, potentially claiming a refund if the amount withheld exceeds the actual tax liability.

An income tax treaty between the United States and the foreign corporation’s country of residence can substantially alter these tax calculations. A treaty may provide a lower tax rate on FDAP income, or in some cases, a complete exemption. It can also reduce or eliminate the 30% branch profits tax. If a corporation is claiming benefits under a tax treaty, it must disclose this position by attaching Form 8833, Treaty-Based Return Position Disclosure, to its Form 1120-F.

Completing and Filing the Return

The filing deadline depends on the corporation’s physical presence in the United States. A foreign corporation with a U.S. office must file by the 15th day of the fourth month after its tax year ends (April 15 for calendar-year filers). A corporation without a U.S. office must file by the 15th day of the sixth month (June 15 for calendar-year filers). A six-month extension can be requested by filing Form 7004 before the original due date.

Corporations can file a paper return or file electronically. Paper filing addresses are in the form’s instructions. Electronic filing is required for corporations filing 10 or more returns of any type during the year and is done through IRS-approved tax software.