What Is Form 1120-F and Who Must File It?

Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, is the Internal Revenue Service (IRS) document for corporations created outside of the United States. It provides the framework for these entities to report income, gains, losses, deductions, and credits connected to their U.S. activities. This reporting is how a foreign corporation calculates and settles its U.S. income tax liability. By filing, corporations can also claim refunds for overpaid taxes and take advantage of benefits provided under international tax treaties.

Determining the Filing Requirement

A foreign corporation must file Form 1120-F if it is “engaged in a trade or business in the United States” (ETBUS). This standard is met if the corporation’s U.S. activities are substantial, continuous, and regular, such as operating a factory or having employees who conclude contracts on its behalf. A filing is required under the ETBUS standard even if the corporation has no income from that business, no U.S. source income, or if its income is exempt under a tax treaty.

A filing is also required if the corporation has U.S. source income and the tax liability was not fully paid through withholding at the source. This often applies to certain types of passive income. A filing obligation also exists for a foreign corporation that is a beneficiary of an estate or trust engaged in a U.S. trade or business, or if it is claiming a refund of over-withheld taxes.

A foreign corporation might file Form 1120-F as a protective measure even if it believes it has no U.S. income or filing obligation. Filing a protective return preserves the corporation’s right to claim deductions and credits if the IRS later determines it had taxable income for that year. Without a timely filed return, the right to these deductions can be lost, resulting in tax being assessed on the full amount of gross income.

The determination of ETBUS is based on specific facts and circumstances. For corporations in countries with a U.S. income tax treaty, the treaty’s definition of a “Permanent Establishment” (PE) can provide clarity, as having a PE means the corporation is ETBUS. Due to these complexities, filing a protective return is a common strategy to mitigate future tax risks.

Information and Documentation for Form 1120-F

Effectively Connected Income (ECI)

Effectively Connected Income (ECI) is income from U.S. sources directly associated with the corporation’s trade or business in the country. This includes revenue from the sale of products, performance of services, or income earned as a partner in a U.S. partnership. To report ECI in Section II of the form, a corporation must gather financial statements for its U.S. operations, including records of gross receipts, cost of goods sold, and related operational expenses.

FDAP Income

Fixed, Determinable, Annual, or Periodical (FDAP) income is passive U.S. source income not connected to a U.S. trade or business, such as interest, dividends, rents, and royalties. Documentation for FDAP income often comes from Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, issued by the U.S. payer. Gathering all Forms 1042-S is necessary for reconciling the income and tax withheld as reported in Section I of Form 1120-F.

Allowable Deductions

A foreign corporation can claim deductions against its ECI. These deductions must be properly allocated and apportioned to the ECI. Common examples include the cost of goods sold, salaries for services rendered in the U.S., rent for U.S. facilities, and state and local taxes. Specific rules govern the allocation methods, which are detailed on Schedule H of Form 1120-F.

Branch Profits Tax Information

Completing the branch profits tax section requires calculations related to the U.S. branch operations. This requires determining the “dividend equivalent amount,” which represents the ECI for the year presumed to be repatriated to the home office. Key inputs for this calculation include the U.S. branch’s “U.S. net equity” at the beginning and end of the tax year, which involves preparing a balance sheet of the branch’s U.S. assets and liabilities.

Calculating the Tax Liability

Tax on ECI

A foreign corporation’s ECI is taxed at the same 21% corporate income tax rate that applies to domestic corporations. The process, calculated in Section II of Form 1120-F, begins with the gross ECI, from which allowable deductions are subtracted to arrive at taxable income. This net figure is then used to compute the primary income tax liability for the U.S. business operations.

Tax on FDAP Income

U.S. source FDAP income not connected to a U.S. business is subject to a flat 30% tax on the gross amount, with no deductions allowed. This tax is collected through withholding by the U.S. entity making the payment. If an income tax treaty exists between the U.S. and the corporation’s home country, this rate may be reduced. The calculation is reported in Section I of the form.

Branch Profits Tax Calculation

The branch profits tax is a second layer of tax on the earnings of a U.S. branch, calculated in Section III. It is intended to create tax parity between foreign corporations operating through a U.S. branch and those operating through a U.S. subsidiary. The tax is 30% (or a lower treaty rate) of the “dividend equivalent amount” for the year.

The calculation starts with the corporation’s ECI, which is adjusted to arrive at “effectively connected earnings and profits” (E&P). This E&P figure is increased if the branch’s U.S. net equity decreased during the year and decreased if the U.S. net equity increased. The final adjusted amount is the dividend equivalent amount, which is multiplied by 30% or the applicable treaty rate to determine the branch profits tax liability.

Completing and Submitting the Return

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 it does, the return is due by the 15th day of the fourth month after the end of its tax year, which is April 15 for calendar-year filers. For corporations without a U.S. office, the deadline is the 15th day of the sixth month after the tax year ends.

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

Form 1120-F can be filed electronically or by mail. Electronic filing is done through an approved IRS e-file provider. For those filing a paper return, the completed form must be mailed to the specific address listed in the IRS instructions.

Required Attachments and Schedules

Form 5472

Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, is required if the corporation had any “reportable transactions” with a related party. This form provides the IRS with information about these transactions to ensure compliance with U.S. transfer pricing rules.

Form 8833

A foreign corporation must attach Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if it claims a U.S. tax treaty overrules or modifies a provision of the Internal Revenue Code. This form discloses the specific treaty provision and the nature of the benefit being claimed. Failure to disclose a treaty-based position can result in a penalty.

Other Statements

Other schedules may be required depending on the corporation’s financial activities. For example, Schedule I is used for the interest expense allocation. The instructions for Form 1120-F provide a full list of potential attachments.