Non-US citizens can face tax obligations if they own a US business and are “engaged in a trade or business in the United States.” This means the Internal Revenue Service (IRS) will likely expect tax filings if your business sells products or services in the United States. One important form that may apply is Form 5472: Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation engaged in a US Trade or Business.
What is Form 5472?
The first portion of this form includes basic information like the name of the corporation, total assets, employer identification number, and business activity. There is also a portion that requires the report of total payments made or received. The law requires a separate form for each related party with reportable transactions. Reportable transactions can include sales and rent.
The IRS uses this form to track transactions that occur with foreign or domestic “related parties.” But what is a related party? Those who meet one of the following qualify:
- Any direct or indirect 25% foreign shareholder of the reporting corporation,
- Any person related to the reporting corporation,
- Any person related to a 25% foreign shareholder of the reporting corporation.
Unfortunately, there is not a clear definition for a related person. The IRS uses various portions of the Tax Code to help guide who qualifies as a related person. These include section 267(b) or 707(b)(1) and section 482.
What if I do not file?
There are situations when the IRS does not require filing. These can include when neither party is a US citizen and either:
- Did not generate a US income, or
- Did not have a sufficient connection to the US.
However, those who are required to file and fail to do so face stiff penalties. A violation can result in $10,000 per transaction plus an additional $10,000 continuation penalty. Defenses are available for those who face accusations of a failure to file. These can include a limited presence in the U.S. or small amounts owed. An attorney can discuss these and other options and tailor a strategy to your situation.