While questions about the nuances of what to pay, how, and when, should be directed to a CPA with specialized experience in foreign-owned U.S. businesses, there are some basic guidelines that can help foreign entrepreneurs get started—specifically, tax forms that every foreign-owned business owner must fill out.
An important note: This list isn’t exhaustive—business owners may have a wide array of additional forms to complete, depending on various factors like size, industry, and more, in order to fully meet their IRS obligations.
With that said, let’s take a closer look at some of the tax forms that will apply to various business entities owned by non-U.S. citizens.
Tax forms for foreign-owned sole proprietorships
As a non-U.S. citizen, you can only operate a sole proprietorship in the U.S. by becoming a single-member LLC first. Then, as a single-member LLC, you can file taxes as a disregarded entity (DE)—i.e., a sole proprietorship.
Before looking into the tax forms, you’ll need to determine whether your income is subject to U.S. taxes.
As a foreigner, you are only taxed in the U.S. if you are “engaged in a trade or business in the United States.” You are considered to be engaged in a U.S. trade or business when you perform services or sell products in the United States.
The income you earn through this work is called Effectively Connected Income (ECI).
If however, you are not engaged in a trade or business in the U.S., you are not taxed on any income—even the income that is generated in the U.S.
Once you determine that you have engaged in a trade or business in the U.S. and have ECI, you will be required to report your income to the IRS by filing a U.S. tax return.
Starting in 2017, all foreign-owned single-member LLCs that are Disregarded Entities (essentially sole proprietorships) are now treated as corporations for federal reporting requirements to the IRS. This doesn’t mean the LLC is paying tax like a corporation—rather, it’s simply reporting information like a corporation.
Below are the forms that you may be required to fill out:
Form 1120 (U.S. Corporation Income Tax Return)
The only information required to be completed on Form 1120 is the name and address of the foreign-owned U.S. DE and items B and E on the first page.
The foreign-owned U.S. DE has the same tax year used by its owner for U.S. tax filing requirements or, if none, the calendar year.
Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business)
This form is used to report transactions that occur with a foreign or domestic “related party,” which the IRS defines as:
- Any direct or indirect 25% foreign shareholder of the reporting corporation,
- Any person who is related to the reporting corporation,
- Any person who is related to a 25% foreign shareholder of the reporting corporation, or
- Any other person who is related to the reporting corporation.
In other words, if your foreign-owned business has reportable transactions with anyone who falls into one of these categories, you’ll fill out a separate Form 5472 for each one.
Because the meaning of “related to” can be interpreted in different ways, it’s recommended that non-U.S. business owners read this instruction guide prepared by the IRS, watch this instructional video, or—better yet—work with their CPA or tax attorney on this form and the requirements.
Tax forms for foreign-owned partnerships
Foreign-owned multi-member LLCs filing as partnerships are required to file a U.S. tax return if they are engaged in a trade or business in the U.S.
However,unlike single-member LLCs, you are not required to file Form 5472 and Form 1120. Instead, you must file taxes like a U.S. domestic partnership. Additionally, if your partnership had no business activity (income, expenses, deductions, and credits you’d like to claim), you are not required to file a U.S. tax return.
The IRS also requires partnerships with foreign partners to withhold tax from the foreign partner’s allocable income that is connected with a U.S. business or trade. So, if you are a U.S. citizen whose business partner is a resident or citizen of another country, you’ll need to make sure your business is withholding U.S. taxes from your partner’s allocable income (or net income). This is set out under the Internal Revenue Code section 1446.
These withholding taxes must be paid regardless of the amount of your foreign partner’s ultimate U.S. tax liability.
Here are the forms you’ll need to complete:
Form 1065 (U.S. Return of Partnership Income)
This form is used to report the income, gains, losses, deductions, credits, etc of the partnership.
Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc. )
The partnership files a copy of Schedule K-1 (Form 1065) with the IRS to report each partner’s share of the partnership’s income, deductions, credits, etc.
Each partner of the partnership also receives a copy of this schedule which they use to file their personal income tax return.
Schedule K-2 (Partners’ Distributive Share Items—International)
This form is used to report items of international tax relevance, including:
- Foreign tax credit-related information
- The sourcing and bucketing of income and deductions
- Interests in foreign entities or distributions from foreign corporations.
Schedule K-3 (Partner’s Share of Income, Deductions, Credits, etc.—International)
In general, the Form 1065 Schedule K-3 reports a partner’s distributive share of items of international tax relevance (as reported in Schedule K-2, above) and is an extension of the Form 1065 Schedule K-1.
Form 8804 (Annual Return for Partnership Withholding Tax)
This form is used to report the total withholding liability for the partnership’s tax year.
Form 8805 (Foreign Partner’s Information Statement of Section 1446 Withholding Tax)
This form is used to show the amount of effectively connected taxable income (ECTI) and the total tax credit allocable to the foreign partner for the partnership’s tax year.
Form 8813 (Partnership Withholding Tax Payment Voucher)
This form is used to pay the partnership’s withholding tax. This voucher must accompany each payment of withholding tax made during the partnership’s tax year.
Tax forms for foreign-owned C corporations
The use of a C corporation structure is often very attractive to foreign business owners. Because C corporation’s profits and losses do not flow through to its owners, foreign C corp shareholders will not need to file U.S. personal income tax returns.
Below are the forms they are required to file:
Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business)
Just like Disregarded Entities—foreign-owned sole proprietorships that become single-member LLCs for the purpose of filing U.S. taxes, as related in the sole proprietorship section above—C corporations must fill out Form 5472 to report transactions with related parties.
Form 1120 (U.S. Corporation Income Tax Return)
Foreign-owned U.S corporations are subject to state income taxes and a 21% federal corporate tax rate on their global taxable income. This is the form foreign-owned C corp will use to report their global taxable income for their federal taxes.
Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding
If your corporation paid dividends to non-resident shareholders, you’ll use this form to report those dividends. These dividends are subject to a 30% withholding tax of the gross amount, and you’ll declare both the withholding taxes and dividend amount on Form 1042-S and Form 1042 at year-end.
You may benefit from a lower withholding tax rate if the U.S. has signed a tax treaty with your country. U.K. residents, for example, enjoy a 15% withholding tax rate. Note that you must claim this tax benefit by filling out a Form W-8BEN and submit the withholding certificate to the company.
Related reading:What is Double Taxation? A Small Business Guide for C Corp**s
Tax forms for foreign-owned S corporations
According to the law, foreign citizens who are non-U.S residents cannot be owners of an S corporation.
Thus, S corporations can only be owned by foreign citizens who are resident aliens—individuals who are not citizens of the United States, and who meet either the green card test or the substantial presence test for the calendar year.
For resident aliens who own an S corp, the following tax forms will apply:
Schedule K-2 and K-3
Schedules K-2 and K-3 are an extension of the current Schedules K and K-1. They’re designed to streamline the way you report items of international tax relevance (see the foreign-owned partnerships section above, which details Schedules K-2 and K-3).
There are exceptions to filing these schedules. If your S corps did not have any direct partners who were foreign individuals, partnerships, trusts, estates, or corporations in the tax year 2021, you do not have to file either Schedule K-2 or K-3.
Likewise, if your S corps had no foreign activity in the tax year 2021—whether foreign taxes accrued or paid, or ownership of assets that did or will generate foreign income—you do not have to file these forms.
There are additional, complex situations that result in IRS exceptions to filing these forms due to initial confusion about how corporations were supposed to use them. To see if your C corps qualifies, it’s best to talk directly with a tax advisor or CPA.
Related reading:What is an S Corp and Should You Form One?
General tax forms for all business entities
Many business entities will need to fill out additional forms, regardless of their structure. These include:
Form 1116 (Foreign Tax Credit (Individual, Estate, or Trust))
Non-U.S. citizens who pay taxes in their home country (or another foreign country) can use this form to claim a tax credit on their U.S. taxes, reducing their overall U.S. tax liability.
To be eligible for this tax credit, you must be an individual, estate, or trust that either paid or has accrued taxes to another foreign country or U.S. possession.
This is one way to reduce some of the tax burden that falls on people who owe taxes in two or more countries—it’s a form you won’t want to overlook.
Form 114 (Report of Foreign Bank and Financial Accounts (FBAR)
This form is used to report certain foreign financial accounts, such as bank accounts, brokerage accounts, and mutual funds (if the total value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported).
Generally, an account at a financial institution located outside the United States is a foreign financial account. Whether the account produced taxable income or not has no effect on whether the account is a foreign financial account for FBAR purposes.
U.S. businesses that are foreign-owned have additional tax obligations to consider, not only in the country and states in which they’re doing business, but in their owners’ home countries, too. This brief overview can help entrepreneurs get started, but it’s always a good idea to get additional guidance if you have questions specific to your business.
One thing is true for both foreign-owned and domestic companies: staying on top of your bookkeeping will make filing taxes far easier, especially if you need to file taxes in more than one country.
