Inbound Investment Reporting Series

REPORTING BY FOREIGN INVESTORS IN THE UNITED STATES

The basic reporting vehicles for United States income tax are Form 1120F for foreign corporations and 1040NR for individuals with direct or indirect taxable U.S. activities. In the case of direct investments for foreign legal and natural persons these two IRS forms are used to disclose the details of economic activities. In the case of indirect taxable U.S. activities undertaken by foreign persons these two basic IRS forms report only summary disclosures of currently taxable activities and detailed disclosures appear on investment entity income tax returns. The principal types of investment entities which would give rise to detailed reporting would include partnerships, corporations formed under the laws of the United States, trusts, estates, and limited liability companies.

In addition to the basic activities reporting which is provided through the income tax reporting forms a number of additional IRS forms are required to be processed by the foreign investor or its U.S. business units. Notable among these are:

  1. IRS Form 5472 – This form is used for reporting the ownership structures behind a corporation formed under the laws of the United States. In addition, this form is used to report all transactions between the U.S. corporation and persons directly or indirectly affiliated with the U.S. corporation and the balances loan accounts between the U.S. corporation and affiliates.
  2. IRS Form 1042 – This form, is used for reporting actual and deemed payments to foreign persons when such payments are subject to U.S. withholding taxes. Payments are subject to disclosure irrespective of possible full relief from withholding taxes under the provisions of an income tax treaty.
  3. IRS Forms 8804, 8805 and 8813 - This form series reports income from a U.S. trade or business conducted by a partnership (or, generally a limited liability company) which is allocable to foreign partners (unit holders). The principal purpose of the form series is to calculate and remit withholding tax on that allocation of income.
  4. IRS Form W-8 (Series) – IRS has promulgated this series of forms to provide persons generally, and non U.S. persons specifically, with a standardized format for certifying to payers of income amounts their status under United States tax laws. The various forms certify, among other things:
    • a. Non-U.S. residence status
    • b. Entitlement to tax treaty benefits
    • c. U.S. tax identification numbers
    • d. Intermediary status for receivers of income beneficially owned by others
    • e. U.S. tax compliance with respect to income that is effectively connected to a United States trade or business (i.e. a U.S. permanent establishment).
    • f. Certain special taxpayer classifications
    While these forms are not filed with the IRS, upon request by IRS they must be produced in support of any positions the payer has taken with respect to withholding taxes. Technically, a failure of maintain proper documentation of payee status will result in penalties assessed against the payer who has not withheld taxes even if it is later learned that the payee was in fact entitled to the reduced withholding he was afforded.

NEOITG can explain this sometimes very complicated state of U.S. tax law as well as assist you with the preparation of necessary forms and documentations.