# US/UK Taxes on UK Limited Company for a US Citizen



## Jacquie8981 (Jun 7, 2010)

HELP! I am a US Citizen living in the UK. I have just set-up a UK Limited Company to work through as a contractor. I need some help sorting out the taxes from each side to minimize my tax liability. This is a basic UK Limited Company and I am the only director and only member of the company. I will use it only to get paid by my clients and to pay myself. I expect my income for 2010 to be approximately £50k for the UK tax year (through April) and $50k for the US tax year (through December) Here is what I understand so far.

UK:
If I pay myself dividends from my Limited Company I will pay a low tax rate. But am I allowed to only pay myself dividends and what basic criteria would exclude me from paying myself dividends and make me fall under the PAYE scheme when I pay myself?

US:
Here's where it gets complicated. Dividends in the US are unearned income and are taxed at the same rate as regular income but I wouldn't received the foreign income exclusion. But I can say that I am self-employed and that the dividends are earned income and then with the foreign income exclusion I should only have to pay the 15.3% self-employment tax. I think I would need to file form 8832 to say that my company is "A foreign eligible entity with a single owner electing to be disregarded as a separate entity" and then it would be like a sole-proprietorship and all income would be on Sched C and Sched SE and I would be sorted? But what about form 5471? Would I have to fill that out in this case?

And what if I can't pay myself dividends in the UK, and have to follow the PAYE scheme and thereby pay NI. Then would I have to pay US Self-employment tax, because basically NI is like Social Security which is what the SE tax covers. So would I be self-employed? Hopefully this isn't how I have to go but what would I do if I have to?

I am a US CPA, but with no tax experience. I understand the basics and feel comfortable filling out my own taxes, I just need a push in the right direction as to what forms and how to structure myself to get the lowest tax liability. But I would think if I can pay myself dividends in the UK I will pay 0% on my first £37,400 (10% tax with a 10% tax credit) and then 32.5% on anything above £37,400. And then in the US I would just have to pay 15.3% SE tax as the rest of my income would be excluded with the foreign earned income exclusion. So that would be a pretty low tax liability. 

Please let me know what you think and if I am totally off base and if anyone has a good US/UK tax accountant let me know!!!


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## Bevdeforges (Nov 16, 2007)

OK, things are getting complicated. What, exactly, are you trying to accomplish here? Are you permanently ( well, as permanently as any of us are) located in the UK? Or are you only over there for a couple of years, with the intention of returning to the US afterwards? 

If you are permanently in the UK, why would you want to continue making self-employment "contributions" to the US Social Security system? Wouldn't you be better off paying yourself a salary in the UK and paying into the appropriate social insurance funds there (where, I assume, you receive the benefits - like health care)? In that case, your salary is fully excludable for US income tax purposes, and you don't have to pay the social security bit to the US (the self-employment tax) because you're already covered (and paying into) by the UK social security system.

Seems to me (and I am a CPA, too, albeit with limited tax experience other than my own tax returns from abroad over the last 20 years) you'd simplify your life greatly and probably sleep better at night if you just ran your business normally, paying yourself a salary (and your UK taxes and NI) and excluding all your income on your US returns as earned income. Once you start paying yourself "dividends" you run into the possibility that the IRS will want to consider your limited company as a "Controlled Foreign Corporation" and that's where all the fun starts. 
Cheers,
Bev


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## Jacquie8981 (Jun 7, 2010)

Things are very complicated! I want to pay the lowest possible taxes and earn the most money. A limited company is the way to get the highest wages as a contractor...otherwise my rate would be lower because someone else would be figuring out the taxes and stuff and I would be more like a normal employee to a recruitment agency.

I plan on staying in the UK a while - but it will be 7 more years before I can become a resident, I believe, so it will be a long long long time before I have any recourse to public funds...and more likely than not will end up somewhere else, so I don't care where I pay into the system - because I can withdraw from the system anywhere with all the tax treaties and such.

I think I will end up just paying myself normally and not using dividends, unless someone can help explain to me how to do it. So if someone has done this a better way please let me know. Otherwise, hopefully all my tax forms come back from her majesty because I signed up for a lot of stuff. I might have to spend some time on the phone with HRMC coming up!! Especially since I start work next week and my first paycheck will come the week after!! AHH!

Also - if anyone knows how to set myself up a pension/retirement fund as a self-employed individual - that would be good help to


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## liquiduty (Oct 23, 2010)

Hiya, did you get any further with your queries?


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## michael2010 (Mar 10, 2011)

*Any progress?*

I am in a very similar situation and would appreciate knowing what you learned...


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## Stravinsky (Aug 12, 2007)

michael2010 said:


> I am in a very similar situation and would appreciate knowing what you learned...


Well its an old post but I certainly wouldn't think a Limited company would have been the way to have gone ... a sole trader would have been better ... company returns, accountants, set up fees. On this occasion there were not debtors, just a salary paid in and paid out. Things may have changed, but the HMRC back in the day would have frowned on such a thing


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## michael2010 (Mar 10, 2011)

Stravinsky said:


> Well its an old post but I certainly wouldn't think a Limited company would have been the way to have gone ... a sole trader would have been better ... company returns, accountants, set up fees. On this occasion there were not debtors, just a salary paid in and paid out. Things may have changed, but the HMRC back in the day would have frowned on such a thing


I'm afraid the ship has already sailed, such that I set up a limited company, not understanding the complexities I was introducing to my tax situation. So, now that I have the company, I wonder whether there is any advantage to paying myself part dividends rather than entirely by salary/PAYE. I understand that doing PAYE would make the US taxes simpler as our level of income would be below the Earn Income Exclusion limit for me and my wife. 

So, while we would save on UK taxes by paying dividends, we would then incur a US tax liability on that unearned income. I am thinking that we might just have to run a trial US tax return using tax software and see how our tax liability might work out if we pay dividends. Is there a better way of answering this question for ourselves, or other factors we should be considering?


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## Bevdeforges (Nov 16, 2007)

michael2010 said:


> So, while we would save on UK taxes by paying dividends, we would then incur a US tax liability on that unearned income. I am thinking that we might just have to run a trial US tax return using tax software and see how our tax liability might work out if we pay dividends. Is there a better way of answering this question for ourselves, or other factors we should be considering?


I think you've already answered the question for yourself. Paying yourself in dividends generally leads to double taxation in some form or another. Setting yourselves up as employees of the company really does simplify life - if for no other reason than eligibility for the earned income exclusion.
Cheers,
Bev


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## ibisset (Mar 12, 2011)

*Yuck Limited Company and dividends*



Bevdeforges said:


> I think you've already answered the question for yourself. Paying yourself in dividends generally leads to double taxation in some form or another. Setting yourselves up as employees of the company really does simplify life - if for no other reason than eligibility for the earned income exclusion.
> Cheers,
> Bev


Our identiical situation is actually making my family think of moving back to the USA again which is very sad.

My wife (US Citizen) and myself(UK citizen and GC holder) are both directors of my UK limited company and get paid via low PAYE salaries and high dividends, which is very tax beneficial using the 10% tax credit and 10% dividend tax cancelling each other out.

However now is US tax time and it looks like we'll have to pay USA tax on all these UK dividends. What is the point in using UK tax benefits if US are going to tax the you know what out of it anyway ?

3 questions:

1. Will the US tax people even consider the fact that I have already paid some tax on the UK dividends (10%) 

2. Do we have to fill in a 1099-DIV form ?

3. Can anyone recommend an accountant who has experience in foreign companies, dividends etc ?

Iain in London


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## Bevdeforges (Nov 16, 2007)

ibisset said:


> 1. Will the US tax people even consider the fact that I have already paid some tax on the UK dividends (10%)


Yeah, in taking the foreign income tax credit (form 1116). You are entitled to take a credit against any US taxes due in the amount of the taxes paid in the UK on those dividends.



> 2. Do we have to fill in a 1099-DIV form ?


No. 1099's are for US companies. Assuming you are not registered in the US and therefore your company is not subject to US taxes, you shouldn't have to worry about 1099's and whatever else the IRS normally requires of US companies.



> 3. Can anyone recommend an accountant who has experience in foreign companies, dividends etc ?


Afraid I can't help you there. You might check with some of the Big international accountancy firms (PricewaterhouseCoopers, for example) to see if they have "small business" divisions. A few years back they were all starting up sections for small businesses, but I don't know if they ever really amounted to much.
Cheers,
Bev


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## michael2010 (Mar 10, 2011)

Is this correct then?...A UK limited company pays 20% corporation tax on dividends. The recipient of the dividend payment gets a 10% UK personal tax credit. The US citizen who received dividends can then claim a Foreign Tax Credit for that 10% UK personal tax credit paid by the corporation on his behalf? For example, if £30k dividend is paid by a UK limited company to a US citizen, the company pays £6k corporation taxes and £3k counts as a personal tax credit to the recipient of the dividend--that £3k of UK tax can be claimed as a Foreign Tax Credit. Is this correct, more or less?


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## Bevdeforges (Nov 16, 2007)

michael2010 said:


> Is this correct then?...A UK limited company pays 20% corporation tax on dividends. The recipient of the dividend payment gets a 10% UK personal tax credit. The US citizen who received dividends can then claim a Foreign Tax Credit for that 10% UK personal tax credit paid by the corporation on his behalf? For example, if £30k dividend is paid by a UK limited company to a US citizen, the company pays £6k corporation taxes and £3k counts as a personal tax credit to the recipient of the dividend--that £3k of UK tax can be claimed as a Foreign Tax Credit. Is this correct, more or less?


No. You can't take a credit on your US personal taxes for taxes paid by the company. You can only take a tax credit for taxes paid (not tax credits) to the UK tax authority on your personal income taxes.

It has long been a "problem" in the US that dividends are double-taxed. They are taxed to the company issuing them, and then again as income to the recipient. The fact that the UK gives the company and/or the recipient a tax credit does nothing for you on your US taxes.

The fact of your being paid in dividends rather than in salary may also draw the attention of the IRS, as there is a filing requirement for US citizens or green card holders holding a 10% or greater interest in a "foreign corporation." See form 5471 and instructions for more information.
Cheers,
Bev


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## Andrew James (Nov 6, 2010)

Hi guys, and Bev, hello again!

The current school of thought it that the 10% notional tax credit is not a credible FTC but instead you just tax the net dividend on the US return.

Just to list a few issues, I don't exactly know the nature of your business but:

Is it an active business? If so, it's still a Controlled Foreign Corporation and therefore you may well have Sub Part F income that is attributed irrespective of whether you distributed it or not.

Maybe you think it's active but you fail the assets / income test and then you have a Passive Foreign Investment Company (PFIC). PFICs aren't nice....but you can make a Qualified Electing Fund (QEF) election in year one and more or less come out ok...income retains it's character and losses can flow.

Hmmm, costly for both options...and like you say, knowing after the fact is not really much help. I cannot really think of too many PwC/EY/smaller firms that can help. Well, I can think of one, and they're top class, but very expensive. 

If you were over in Dubai...  :focus:

Hmmm, after more thinking, there's a good chance the dividends you distribute could be qualified divs and therefore at 15% if they are from a Qualified Foreign Corporation and the Double Tax Agreement will determine that - most Australian private companies achieve it so unless the Aus & UK DTAs are that different, you will be helped out there.

Best,

Andrew


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## Andrew James (Nov 6, 2010)

And another thing, how long has it been since the company incorporated? How about a check the box election to tax credit for taxes paid at the corporate level?


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## michael2010 (Mar 10, 2011)

Andrew Landin said:


> And another thing, how long has it been since the company incorporated? How about a check the box election to tax credit for taxes paid at the corporate level?


We created the limited company in mid-2007. It is a trading company--we are essentially online retailers and at the end of the year our aim is not to retain any earnings in the company, but to pay any 'profits' to ourselves as a salary and/or dividend. (I'm just kicking myself now that we didn't do more of this research before starring a limited company, as a sole proprietor route seems the more efficient as I now understand things).

I don't know anything about "qualified dividends"...

As a side note, I rang the IRS helpline at the US Embassy in London today and asked whether I could claim a Foreign Tax Credit on dividends paid out to me from a UK limited company, and the representative emphatically insisted that I could claim FTC, and went on about its purpose to avoid double taxation. I had the impression that he did not understand my question correctly, and after reiterating my situation a couple of times I was receiving the same response, so ended the call a bit frustrated. I guess what is confusing to me is that I read that dividends are taxed personally at 10% in the UK, leading me to believe that a FTC should apply...but then when I see how that 10% is paid, that the limited company pays 20% and the individual recipient of the dividend receives a 10% tax credit, I am lead to think otherwise.


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## Andrew James (Nov 6, 2010)

michael2010 said:


> We created the limited company in mid-2007. It is a trading company--we are essentially online retailers and at the end of the year our aim is not to retain any earnings in the company, but to pay any 'profits' to ourselves as a salary and/or dividend. (I'm just kicking myself now that we didn't do more of this research before starring a limited company, as a sole proprietor route seems the more efficient as I now understand things).
> 
> I don't know anything about "qualified dividends"...
> 
> As a side note, I rang the IRS helpline at the US Embassy in London today and asked whether I could claim a Foreign Tax Credit on dividends paid out to me from a UK limited company, and the representative emphatically insisted that I could claim FTC, and went on about its purpose to avoid double taxation. I had the impression that he did not understand my question correctly, and after reiterating my situation a couple of times I was receiving the same response, so ended the call a bit frustrated. I guess what is confusing to me is that I read that dividends are taxed personally at 10% in the UK, leading me to believe that a FTC should apply...but then when I see how that 10% is paid, that the limited company pays 20% and the individual recipient of the dividend receives a 10% tax credit, I am lead to think otherwise.


Hi Michael,

With the company, this is starting to get very, very technical and I recommend you engage an expert to assist you further; forums can muddle things.

I can't state definitively but I do feel you stand a good chance of being a qualified foreign corporation for the purposes of distributing a 15% tax qualified dividend (well, that can sometimes be 0% tax too if I remember correctly - it's late!).

On the FTC, all I can say is that it is now the global practice of my former employer that notional taxes, or franking credits, whatever you want to call them are not creditable FTCs - they are not paid by the individual.

Best,

Andrew


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## ld_ski (Apr 4, 2011)

*question for Ian*



ibisset said:


> Our identiical situation is actually making my family think of moving back to the USA again which is very sad.
> 
> My wife (US Citizen) and myself(UK citizen and GC holder) are both directors of my UK limited company and get paid via low PAYE salaries and high dividends, which is very tax beneficial using the 10% tax credit and 10% dividend tax cancelling each other out.


Hi Ian - did you get any more info/answers to your questions? My husband and I (both US citizens living in UK) are in the same boat (both of us are directors in Ltds paid in salary/dividends) and also trying to figure out this complex tax situation. I would be happy to share with you what I found out in my search. If you see this and are interested in getting in touch let me know and I will send you my contact details. 

Regards
Loredana


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## michael2010 (Mar 10, 2011)

ld_ski said:


> Hi Ian - did you get any more info/answers to your questions? My husband and I (both US citizens living in UK) are in the same boat (both of us are directors in Ltds paid in salary/dividends) and also trying to figure out this complex tax situation. I would be happy to share with you what I found out in my search. If you see this and are interested in getting in touch let me know and I will send you my contact details.
> 
> Regards
> Loredana


My latest understanding is that it may be possible to get the IRS to treat the UK limited company as a 'disregarded entity' by using form 8332 to 'check the box' to elect to have the UK limited company essentially ignored for US tax purposes. The effect being that the business is treated as a 'flow-through' entity, similar to the way S-corps are taxed in the USA. 

Does anyone know about 'check the box' regulations as they related to dividends paid to owners of UK limited company? Is it correct that such classification of the UK limited company would then allow dividends to be viewed as either earned income, or to qualify for Foreign Tax Credit?


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## Bevdeforges (Nov 16, 2007)

michael2010 said:


> My latest understanding is that it may be possible to get the IRS to treat the UK limited company as a 'disregarded entity' by using form 8332 to 'check the box' to elect to have the UK limited company essentially ignored for US tax purposes. The effect being that the business is treated as a 'flow-through' entity, similar to the way S-corps are taxed in the USA.
> 
> Does anyone know about 'check the box' regulations as they related to dividends paid to owners of UK limited company? Is it correct that such classification of the UK limited company would then allow dividends to be viewed as either earned income, or to qualify for Foreign Tax Credit?


I don't think it's form 8332, which on the IRS website shows up as: Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent 

Maybe you mean form 8833? (Treaty Based Position Disclosure under Section 6114 or 7701(b))
Cheers,
Bev


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## michael2010 (Mar 10, 2011)

Bevdeforges said:


> I don't think it's form 8332, which on the IRS website shows up as: Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent
> 
> Maybe you mean form 8833? (Treaty Based Position Disclosure under Section 6114 or 7701(b))
> Cheers,
> Bev


Sorry, that is form 8832.


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## gayleegreenfrog (Apr 5, 2011)

*Is Loredana still out there?*

Hi, Hope it is okay for me to be jumping in here to say if Loredana or Ian wish to get in touch with me, there might be info to share about a similar situation in the past. Cheers!


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## g . (Apr 17, 2011)

*Another Similar Situation*

I have a similar situation with my wife and I being directors of a UK Limited company. After having previously been advised (seemingly incorrectly?) that there was no US tax implication on starting a UK Limited company because it isn't a US entity, I have just recently learned about form 5471 and am trying to understand the reporting and tax consequences.

-g


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## g . (Apr 17, 2011)

Looks like I don't have privileges to edit or message people :-(. I'd be interested in getting in touch with others to learn how they handled this situation or if they could recommend a knowledgeable advisor in London. Please feel free to contact me.

Thanks.

-g


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## Andrew James (Nov 6, 2010)

Hello,

If you do a search in google you will come up with people who can assist you.

Best,

Andrew


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## Bevdeforges (Nov 16, 2007)

g . said:


> I have a similar situation with my wife and I being directors of a UK Limited company. After having previously been advised (seemingly incorrectly?) that there was no US tax implication on starting a UK Limited company because it isn't a US entity, I have just recently learned about form 5471 and am trying to understand the reporting and tax consequences.
> 
> -g


Before you get too worried about filing form 5471, be sure to take a look at the instructions for form 8832. (Yeah, weird IRS logic, I know.) Page 7 of the instructions provides a list of the types of business entities in various countries that are considered corporations for Federal tax purposes. Why this list isn't included with the instructions for form 5471 I'll never know - but it takes much of the worry out of the whole form 5471 hoopla. Form 5471 applies only to "certain foreign corporations" - if your business form isn't considered a corporation then you're off the hook.
Cheers,
Bev


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## michael2010 (Mar 10, 2011)

g . said:


> Looks like I don't have privileges to edit or message people :-(. I'd be interested in getting in touch with others to learn how they handled this situation or if they could recommend a knowledgeable advisor in London. Please feel free to contact me.
> 
> Thanks.
> 
> -g


I found an 'enrolled agent' in London on the NAEA website--have a look there, search to find an agent in the UK, and there is one whose location is in Wimbledon who I spoke with and was familiar with the 5471 and the "check the box" regulations related to form 8832. Of nearly 10 expat tax preparation specialists I have spoken to recently, he was one of two who brought up 'check the box regulations,' which seems to me to be the best way forward if you own your own company here and wish to pay yourself in dividends.


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## michael2010 (Mar 10, 2011)

Bevdeforges said:


> Before you get too worried about filing form 5471, be sure to take a look at the instructions for form 8832. (Yeah, weird IRS logic, I know.) Page 7 of the instructions provides a list of the types of business entities in various countries that are considered corporations for Federal tax purposes. Why this list isn't included with the instructions for form 5471 I'll never know - but it takes much of the worry out of the whole form 5471 hoopla. Form 5471 applies only to "certain foreign corporations" - if your business form isn't considered a corporation then you're off the hook.
> Cheers,
> Bev


Does anyone know whether the 8832 'check the box' classification can be applied retroactively for previous years for which no US returns were filed? If so, how far back?


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## liquiduty (Oct 23, 2010)

Michael2010, I seem to be unable to respond to your PM/conversation, probably because I'm too new to this board.

I was interested in going contracting as a limited company but my tax adviser advised against it because of the IRS' filing requirements for owners of foreign corporations. In addition, the earned income exclusion doesn't apply to UK dividend income so it could all be rather costly. he suggested working as a sole trader. However, I have since found permanent full-time employment so it's all become a moot point for me.


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## gayleegreenfrog (Apr 5, 2011)

I too wish to exchange some thoughts but do not know how to do so outside of the forum??!!


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## Bevdeforges (Nov 16, 2007)

gayleegreenfrog said:


> I too wish to exchange some thoughts but do not know how to do so outside of the forum??!!


You need to have posted a few legitimate posts (i.e. not one worders to raise your post count) - it looks like you have enough to send and receive PM's (private messages).

To send a PM, click on the name of the person you wish to PM in any message they have posted. You'll get a drop down menu that includes the option to send a private message to the person.
Cheers,
Bev


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## g . (Apr 17, 2011)

Bevdeforges said:


> Before you get too worried about filing form 5471, be sure to take a look at the instructions for form 8832. (Yeah, weird IRS logic, I know.) Page 7 of the instructions provides a list of the types of business entities in various countries that are considered corporations for Federal tax purposes. Why this list isn't included with the instructions for form 5471 I'll never know - but it takes much of the worry out of the whole form 5471 hoopla. Form 5471 applies only to "certain foreign corporations" - if your business form isn't considered a corporation then you're off the hook.
> Cheers,
> Bev


According to this list of "Foreign Entities Classified as Corporations for Federal Tax Purposes" only Public Limited Company is included in the UK, so then since I have a Private Limited Company, then I am not required to complete form 5471?

-g


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## michael2010 (Mar 10, 2011)

g . said:


> According to this list of "Foreign Entities Classified as Corporations for Federal Tax Purposes" only Public Limited Company is included in the UK, so then since I have a Private Limited Company, then I am not required to complete form 5471?
> 
> -g


But the instructions also say that any entity in which all shareholders have limited liability is considered a corporation. Every tax preparer I have spoken with has said a limited company is required to file a 5471....the only way out of that, as I currently understand it, is to file a 8832 to elect to classify the limited company as either a partnership (if there is more than one owner) or as a disregarded entiry (if there is just one owner).


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## Bevdeforges (Nov 16, 2007)

g . said:


> According to this list of "Foreign Entities Classified as Corporations for Federal Tax Purposes" only Public Limited Company is included in the UK, so then since I have a Private Limited Company, then I am not required to complete form 5471?
> 
> -g


That's the reading I'm going with. The filing requirement is for "certain foreign corporations" though they don't seem to specify what they mean by "certain." Then they have that nice list of what is considered a corporation for Federal tax purposes. If they don't consider it a corporation for Federal Tax purposes for the 8832, why should it be a corporation for form 5471?
Cheers,
Bev


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## Pagan98 (Apr 21, 2011)

We were in exactly the same situation. I'm a UK citizen, my wife is a dual UK-US citizen. We set up a private UK Limited company making my wife a 50% shareholder. We subsequently found out about the US tax implications (Controlled Foreign Corporation, Passive Foreign Investment Company), the onerous and expensive filing requirments (form 5471 with big penalties if you fail to file), and the potential for double taxation of dividend income (because of division of opinion on whether the UK tax voucher counts for foreign tax credit).

As others have suggested, the solution was to file form 8832 to elect for the company to be treated as a partnership for US tax purposes (having first applied for an Employer Identification Number on form SS-4). This allows my wife's half of the company's income and expenditure to be reported on Schedule C of form 1040, depreciation on form 4562 and the Foreign Earned Income Exclusion to be claimed on the profit using form 2555.

This cost us a ridiculous sum (we're talking thousands of pounds) in the first year to file the 5471 and 8832, although that may be the overpriced firm we used - they did have very nice offices! The ongoing cost is much more reasonable £780 per annum now we've found an alternative tax adviser/preparer (although still not cheap considering no tax is actually due!).

I hope this helps others avoid our mistakes!


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## michael2010 (Mar 10, 2011)

Excellent response, thank you. This should be very helpful. Your response corroborates what I have learned from tax advisers, that there is no way to avoid being double taxed on dividends or the 5471 filing requirement except though the 8832 'check the box' election. After this is filed then instead of a 5471, a 8865 form must be filed since the shareholders in the 'controlled foreign corp' are then viewed as a partnership by the IRS.

I have two follow up questions based on your experience:

1 - if your UK limited companies year end did not coincide with the calendar year end, how did you deal with that on your US returns?

2 - I am not familiar with a 'Passive Foreign Investment Company'--is that a classification of the UK limited company based on retained earnings or capitol investments (and does this have to do with the sub-part F of form 5471)?


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## Pagan98 (Apr 21, 2011)

michael2010 said:


> After this is filed then instead of a 5471, a 8865 form must be filed since the shareholders in the 'controlled foreign corp' are then viewed as a partnership by the IRS.


We have been advised that an 8865 is not required each year, as long as there is nothing to report such as a change in partnership (share) holdings. 


michael2010 said:


> I have two follow up questions based on your experience:
> 
> 1 - if your UK limited companies year end did not coincide with the calendar year end, how did you deal with that on your US returns?


I dont know. Our company year ends 31 December. I know we changed the company year end in our first year, which may be worth exploring with your UK accountant.


> 2 - I am not familiar with a 'Passive Foreign Investment Company'--is that a classification of the UK limited company based on retained earnings or capitol investments (and does this have to do with the sub-part F of form 5471)?


As I understand it the PFIC classification arises because of a lack of plant and places limits on the dividends that can be withdrawn compared with previous years, to tackle avoiding tax by holding funds offshore when working and then drawing down once retired. The penal tax rate if the limits are exceeded are significant iirc.


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## Pagan98 (Apr 21, 2011)

Just to clarify my post above, the reason the 8865 is not required annually is because US persons do not own greater than 50% of the partnership interests. If all US persons own in excess of 50% of the partnership interests and any individual partner owns 10% or more an annual 8865 would be required. (My wife owns exactly 50% so we're in the clear).


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## Pagan98 (Apr 21, 2011)

michael2010 said:


> Does anyone know whether the 8832 'check the box' classification can be applied retroactively for previous years for which no US returns were filed? If so, how far back?


I believe the answer is no. We were only able to backdate the election by a couple of months to the start of the current tax year and had to file a 5471 for the preceding year.


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## g . (Apr 17, 2011)

Pagan98 said:


> The ongoing cost is much more reasonable £780 per annum now we've found an alternative tax adviser/preparer (although still not cheap considering no tax is actually due!).


I'm thinking if I put the company's income on our 1040, we'd owe more taxes and wouldn't have the tax credits.


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## ld_ski (Apr 4, 2011)

michael2010 said:


> I found an 'enrolled agent' in London on the NAEA website--have a look there, search to find an agent in the UK, and there is one whose location is in Wimbledon who I spoke with and was familiar with the 5471 and the "check the box" regulations related to form 8832. Of nearly 10 expat tax preparation specialists I have spoken to recently, he was one of two who brought up 'check the box regulations,' which seems to me to be the best way forward if you own your own company here and wish to pay yourself in dividends.


Hi 

Is anyone willing to recommend an advisor they have been happy with? We have a very complex tax situation and really need good expert advice. 

I am still unclear on the tax implications of owning your own UK Ltd company with respect to dividends. Is someone willing to spell it out, assuming 100% ownership of UK Ltd? What about 100% ownership with no dividends in year?

I don't have enough posts for PMs to be enabled on my end yet but hope to soon .

Thanks


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## msactax (May 11, 2011)

*msactax*



ld_ski said:


> Hi
> 
> Is anyone willing to recommend an advisor they have been happy with? We have a very complex tax situation and really need good expert advice.
> 
> ...


I didn't realise I wasn't allowed to put specific names on - but I would suggest that you contact the Consolates in Edin/London and ask if they recommend any firms.

regards
Frances


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## g . (Apr 17, 2011)

msactax said:


> I didn't realise I wasn't allowed to put specific names on - but I would suggest that you contact the Consolates in Edin/London and ask if they recommend any firms.
> 
> regards
> Frances


It is a bit frustrating that recommendations can't be posted publicly and private messages are disabled until you make 5 posts. It makes it difficult to get help.

From the searching I have done, it seems that expat tax specialists in the US are more knowledgeable than UK/US tax specialists in the UK. I still haven't found anyone that I have great confidence in though.

And this is is my fifth post...

-g


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## msactax (May 11, 2011)

g . said:


> It is a bit frustrating that recommendations can't be posted publicly and private messages are disabled until you make 5 posts. It makes it difficult to get help.
> 
> From the searching I have done, it seems that expat tax specialists in the US are more knowledgeable than UK/US tax specialists in the UK. I still haven't found anyone that I have great confidence in though.
> 
> ...


Well I'll get into trouble with the moderator if I effectively advertise on the web - which I understand. All I can say is ask the Edinburgh Consulate for a recommendation - because I think that they will recommend the person that I would like to recommend to you - and he has over 26 years experience here in the UK with US taxes and they can cover all UK too.


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## ld_ski (Apr 4, 2011)

*recommendation followup*



msactax said:


> Well I'll get into trouble with the moderator if I effectively advertise on the web - which I understand. All I can say is ask the Edinburgh Consulate for a recommendation - because I think that they will recommend the person that I would like to recommend to you - and he has over 26 years experience here in the UK with US taxes and they can cover all UK too.


Hi Frances, 
I was wondering, the person you have in mind whom you think will be recommended by the Edinburgh US consulate - is that someone who has prepared your returns and you are confident in his/her ability and happy with them? Or simply someone that the Consulate recommends? 

The reason I ask is that I spoke to another forum member and he said that some of the advisors that the US Consulate in London recommended did not inspire him with confidence and he felt some were not very knowledgeable. 

I would greatly prefer to find an advisor that someone on this forum has worked with and is happy with. I know PMs are not yet enabled for me, but I'll keep posting .

Many thanks.
-L


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## ld_ski (Apr 4, 2011)

*caveat on 8832*



michael2010 said:


> But the instructions also say that any entity in which all shareholders have limited liability is considered a corporation. Every tax preparer I have spoken with has said a limited company is required to file a 5471....the only way out of that, as I currently understand it, is to file a 8832 to elect to classify the limited company as either a partnership (if there is more than one owner) or as a disregarded entiry (if there is just one owner).


From my research today I see that there are strict deadlines for form 8832:

excerpt from a website (can't post url, won't allow me but if you search google for "aicpa form 8832" it will come up as the first result)


_When is it Due?

According to the instructions, "... an election ... can take effect no more than 75 days prior to the date the election is filed, nor can it take effect later than 12 months after the date on which the election is filed."

The election is only applicable to an entire tax year. The instructions appear to mean that the election may be filed within a year before it is to be effective or within 75 days after the date it is to be effective. Thus, with a newly formed entity, this form should be filed within 75 days of the start of the fiscal year of the entity._

So for most of us, it's back to form 5471 it seems...!

Please feel free to jump in and correct me, but my understanding of form 5471 is that it's basically a disclosure form. As is FBAR if you hold more than $10,000 in a foreign bank account(s), or bank accounts where you are a signatory (but not the owner). I got the impression that neither 5471 nor FABR automatically impact on US tax liability. But reading Pagan98's post earlier he seemed to imply it DID have an impact on dividends. Any more insights on this?

No one seems to be mentioning qualified dividends. Any experience with how these work?

Thanks,
-L


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## g . (Apr 17, 2011)

ld_ski said:


> From my research today I see that there are strict deadlines for form 8832:
> 
> excerpt from a website (can't post url, won't allow me but if you search google for "aicpa form 8832" it will come up as the first result)
> 
> ...


The information I have received (now from multiple sources) is similar -- that the 5471 is reporting activity, but does not affect tax liability similar to the FBAR.

-g


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## Andrew James (Nov 6, 2010)

g . said:


> The information I have received (now from multiple sources) is similar -- that the 5471 is reporting activity, but does not affect tax liability similar to the FBAR.
> 
> -g


Hi,

It depends on whether there's any sub=part F income or not. If there is, it's a deemed dividend on the tax return so the 5471 does affect things in certain instances.

As for the question asked about qualified dividends, I'm pretty sure I have answered that previously?

Cheers,

Andrew


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## Andrew James (Nov 6, 2010)

Andrew Landin said:


> Hi guys, and Bev, hello again!
> 
> The current school of thought it that the 10% notional tax credit is not a credible FTC but instead you just tax the net dividend on the US return.
> 
> ...


Last paragraph. Actually, in this thread, there is lots of information. I've discussed briefly check the box elections, qualified divs and sub-part F and others have chipped in too with usually information. Just google search people's names and see what it comes up with. I could suggest people in London that I used to work with but it all depends how much you are wanting to pay to get quality answers and advice.

Cheers,

Andrew


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## ld_ski (Apr 4, 2011)

*sub-part F*



Andrew Landin said:


> Last paragraph. Actually, in this thread, there is lots of information. I've discussed briefly check the box elections, qualified divs and sub-part F and others have chipped in too with usually information. Just google search people's names and see what it comes up with. I could suggest people in London that I used to work with but it all depends how much you are wanting to pay to get quality answers and advice.
> 
> Cheers,
> 
> Andrew


Thanks Andrew. You mentioned 'there's a good chance the dividends you distribute could be qualified divs and therefore at 15%', so my question is whether anyone knows if these can apply in the UK? I spoke to one advisor who seemed to suggest it does, anyone else have experience of this in the UK? 

As for the sub-part F of form 5471 - can you please elaborate on this please? 

Finally, in terms of the FBAR, is it a personal tax liability we are talking about here, that arises for a US signatory of a UK business bank account, from the interest the business earns on the money in its account? Even if you have no shareholding in the business which owns the account? So for example an officer of the business like a Company Secretary? 

Thanks again,
-L


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## Andrew James (Nov 6, 2010)

ld_ski said:


> Thanks Andrew. You mentioned 'there's a good chance the dividends you distribute could be qualified divs and therefore at 15%', so my question is whether anyone knows if these can apply in the UK? I spoke to one advisor who seemed to suggest it does, anyone else have experience of this in the UK?
> 
> As for the sub-part F of form 5471 - can you please elaborate on this please?
> 
> ...


Hi,

Sub-part F income is a bit of a tricky one. Where you have a controlled foreign corporation, it's the passive element of the profit which is required to be deemed to have been distributed in accordance with the percentage ownership share. This is an ordinary dividend on your return. When that part of the profit actually is distributed, there is, of course, a balancing calculation that gets done.

Re the qualified dividends, without looking closely at your company, you should be able to categorize the dividends as qualified because the UK has a comprehensive double tax treaty with the US and the dividends are subject to UK tax. This is usually the case even for a private company that is not listed.

Re FBAR, signature authority with no ownership in the company is still required to be reported (so long as you otherwise meet the FBAR criteria of course).

Re check the box elections, most of you are probably too late, that's why these things should be talked about in advance. But trust me, I've seen plenty of huge businesses come to me, and also in prior employment, where they didn't think about it so you are far from the only one.

Cheers,

Andrew


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## Bevdeforges (Nov 16, 2007)

ld_ski said:


> Finally, in terms of the FBAR, is it a personal tax liability we are talking about here, that arises for a US signatory of a UK business bank account, from the interest the business earns on the money in its account? Even if you have no shareholding in the business which owns the account? So for example an officer of the business like a Company Secretary?


The FBAR is only a reporting requirement - though it does give the IRS the information they need to go in and ask questions at the various foreign banks.

Yes, a "US person" who is a signatory on a company account has to report the account to the Treasury Dept. - but many US based companies do a filing for all their foreign bank accounts and if they do this, the individuals do not have to file a separate FBAR form each year. Not sure if the company filing is an option for non-US based companies, but it could be worth looking into.
Cheers,
Bev


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## michael2010 (Mar 10, 2011)

Andrew Landin said:


> Hi,
> 
> Sub-part F income is a bit of a tricky one. Where you have a controlled foreign corporation, it's the passive element of the profit which is required to be deemed to have been distributed in accordance with the percentage ownership share. This is an ordinary dividend on your return. When that part of the profit actually is distributed, there is, of course, a balancing calculation that gets done.
> 
> ...




Re 8832---I thought that the IRS had made possible to obtain extended late classification relief as long as the proper form for the intented classification had been filed on time. In other words, for 2010, if I file the forms for a partnership (because we have more than one shareholder) on time, can't I file the 8832 to change classification under the new guidelines for late classification introduced in 2007?


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## Andrew James (Nov 6, 2010)

michael2010 said:


> Re 8832---I thought that the IRS had made possible to obtain extended late classification relief as long as the proper form for the intented classification had been filed on time. In other words, for 2010, if I file the forms for a partnership (because we have more than one shareholder) on time, can't I file the 8832 to change classification under the new guidelines for late classification introduced in 2007?


Hi Michael,

There is a grace period that the IRS allows for late classification, 75 days off the top of my head. I can't recall the guidelines you are talking about but it's possible - it sounds logical based on the information you have provided.

I do 5471s fairly regularly, maybe 10% of my clients have them. Whilst they cause a bit of a headache, they're not too bad - mostly they are just informational. If you do manage the whole classification as a partnership approach, then just make sure you keep on top of the 5471-equivalent reporting with partnerships - out of the frying pan, into the fire in some respects! Broadly the same information, just usually not as many occasions that filing is required.

Cheers,

Andrew


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## michael2010 (Mar 10, 2011)

Andrew Landin said:


> Hi Michael,
> 
> There is a grace period that the IRS allows for late classification, 75 days off the top of my head. I can't recall the guidelines you are talking about but it's possible - it sounds logical based on the information you have provided.
> 
> ...


I understood the grace period to be 3 years and 75 days (so maybe that's where your 75 day recollection is rooted). Of course, it is only applicable if the proper form for the intended classification had been filed on time.

I assume you meant 8865 instead of 5471--so 8865 is required for foreign parnership instead of 5471. 

This would mean that if someone had mistakenly been filing a 8865 because they failed to file a 8832 to re-classify their entity, then they would be able to go back 3 years and 75 days to correct the classification. But, if the 8865 had not been filed, or if nothing had been filed, the 8832 cannot be filed late. However, by these rules it would seem that 8832 can be done for 2010 as long as the appropriate 8865 is filed (assuming there is m more than one shareholding, thus re-classifying the ltd co to a partnership--if one shareholder I presume the UK ltd co would be a 'disregarded entity' and the individual owner would be treated as a sole proprietor by the IRS).

Can you confirm or correct any of this?


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## Andrew James (Nov 6, 2010)

Hi Michael,

I try not to use tax jargon in my post hence referring to the partnership reporting as "5471 equivalent" so not to introduce yet another form number into the conversation.

My recollection of the entity reclassification, and it's been a while, is that you can only go back 75 days when reclassifying although the IRS does allow you to put forward a case for why this should be extended.

I can't offer much more to you at this stage, Michael, I've still got one month of tax season to go (roll on June 15) and it's 12:30am here in Dubai now.

Cheers,

Andrew


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## msactax (May 11, 2011)

*US tax returns and FBARs*



ld_ski said:


> Hi Frances,
> I was wondering, the person you have in mind whom you think will be recommended by the Edinburgh US consulate - is that someone who has prepared your returns and you are confident in his/her ability and happy with them? Or simply someone that the Consulate recommends?
> 
> The reason I ask is that I spoke to another forum member and he said that some of the advisors that the US Consulate in London recommended did not inspire him with confidence and he felt some were not very knowledgeable.
> ...


Hi - He has not prepared my returns but I am confident in his abilities. 

Just another aside for general comment please be aware of the need to also do any FBAR reports that you require to do.

FBAR - are Foreign bank account reports. You require to report all foreign bank accounts to the IRS where the balance has at any point in the calender year exceeded $10,000. There may be no tax due upon the filing of these reports but the penalties for not filing them are extensive and penal.

This includes all foreign accounts on which you have signature control. e.g. You could have power of attorney over your parent's canadian bank account - it needs to be reported.

The FBAR is due by June 30 of the year following the year that the account holder meets the $10,000 threshold. The granting, by IRS, of an extension to file Federal income tax returns does not extend the due date for filing an FBAR. Filers cannot request an extension of the FBAR due date. 

I hope that this helps - I cannot yet post URL's - when I can I will give you a link to the IRS website on this.

Frances


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## ld_ski (Apr 4, 2011)

*pm*

Hi,
I case you are checking this forum, I sent you a PM.
Many thanks
L


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## Little Bear (Jul 9, 2011)

*W-9 or which W-8?*

We are in the same situation as Pagan98 - I'm a dual US-UK citizen and my wife is a UK citizen only. We set up a private UK Limited company, each having a 50% share and we are both working. We filed the SS-4 to get an EIN and then 8832 to elect for the company to be treated as a partnership for US tax purposes. Now we are trying to invoice a US client and can't figure out whether to file a W-8 or a W-9. 

It seems clear that the W-9 isn't appropriate, its intended for a US person which is defined as:

An individual who is a US Citizen or US resident alien. I am a citizen, but my company (which is being contracted) is not. 
A partnership, corp, company or association created or organised in the US or under the laws of the US. Again- not us, we are a UK company. 
Any estate (other than a foreign estate). Not applicable. 
A domestic trust. Not applicable.

Thus it seems we fail on all counts for filing the W-9.

We have looked at the W-8BEN, W-8ECI, W-8EXP and W-8IMY. Of the various forms it looks like the W8-ECI is the most appropriate as it states this form should be filed to confirm that I am the beneficial owner of the income being paid which is connected with a US trade or business. If this is the case then my client should not withhold and I would simply report our income together with my other income on my annual return.

As the beneficial owner, it would seem that my personal details should go in part 1 of W-8ECI rather than my company's. Also the instructions seem to indicate where the income will be joint, a W-8ECI should be completed by each owner. The forms are confusing however because the basic premise of the W-8ECI is that I am a Foreign Person – which I am not. It creates a bit of a paradox as it suggests that if I am not foreign, then I should file a W-9 instead - which I can’t do because at that level, my company is foreign.

On the whole, the forms lead me round in circles - it seems easy enough to apply more than one of the forms to my circumstances. I think the W-8ECI is probably the most applicable, although it still seems contradictory as I am are not a foreign person to the US. Does anyone have experience with this situation? Thanks in advance for any help you can offer...


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## msactax (May 11, 2011)

Just an update for all.

_2011 OVDI AMENDMENTS

To further encourage US taxpayers to update their filing compliance, the terms of the 2011 Tax Amnesty (OVDI) were substantially improved on 2 June 2011.

Under this amendment, the OVDI penalty is reduced from 25% of total assets, including in some cases the main residence, to just 5% of financial assets excluding the main residence, provided specific conditions are met. To qualify for the lower 5% penalty an individual needs to be resident outside the US, have less than $10,000 of US source income each year and have made a good faith effort to be compliant in the country where he/she is resident.

The OVDI deadline remains 31 August, although the IRS may now give an extra 90
days grace if a detailed request is made by 31 August. 

To sum up the current position, The OVDI is one of three methods for correcting past failings before the IRS becomes aware of an issue, a prospect made more likely as a result of the FATCA legislation. 

The second alternative is ‘quiet filing’, which is achieved by simply mailing returns to be processed, although the IRS is known to be looking to audit such returns.

The third alternative is to by filing returns and in doing so making a full voluntary disclosure (but outside the OVDI, so with no fixed 25% or 5% penalty) but seeking mitigation of penalties with a ‘reasonable cause’ argument. Such voluntary disclosure is made under the terms of the Internal Revenue Manual which requires:
disclosures that are truthful, 
• complete and timely;
• co-operation in determining correct tax liabilities; and
• that taxpayers make a good faith effort to pay any tax, interest and penalties.
Again the IRS is sending strong signals that it intends to audit in many cases.

To conclude, it is strongly recommended that those involved should seek to ensure their US tax compliance is complete, up to date and comprehensive and in doing so, if action is required at this stage, careful so consideration should be made as to which declaration alternative is appropriate.

NEW DECLARATION REQUIREMENTS

Also in June 2011, the IRS released a draft of an additional and complex form that will soon be mandatory for many US taxpayers with overseas financial interests.

This new IRS Form 8938, requires individuals with interests in non-US bank accounts, brokerage accounts, pension plans, companies, partnerships and other financial or investment funds to file. Given this scenario, I would anticipate that the data gathering involved may be very extensive.,

The first form 8938 will be filed in 2012 for assets held since 1 January 2011. This new form will be in addition to existing FBAR requirements and additional annual reporting required for investments in passive foreign investment companies (PFICs), foreign companies, foreign partnerships and foreign trusts.

The legislation requires individual US taxpayers with an aggregate balance of more
than $50,000 in foreign financial assets to file new form 8938 with their annual US
income tax returns. In line with other information declaration requirements on overseas assets imposed by the US Tax Code, failure to file this new information return will result in the imposition of potentially extensive penalty charges. 

My own view is that the penalty reductions on the OVDI is very welcome and may assist in engaging Americans to meet the IRS agenda of encouraging those requiring to file to get back “into the fold”. However, I suspect the introduction of Form 8938 will result in a complex and substantially greater disclosure requirement to American Citizens and Green Card Holders who have built their lives and financial interests outside the US.

Hope that this helps_


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## Jacquie8981 (Jun 7, 2010)

*Wow!*

3 Years later and I'm still researching the same thing. Imagine my surprise when my google search pulled up this thread. Anyone have any luck? I'm still looking for a good accountants. I've been through a few now and none have been very helpful. 

I'm very keen on knowing more about the 8832 if anyone has tried it!!! Please let me know the results.


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## cescolar (May 31, 2013)

*Really????*



Bevdeforges said:


> Before you get too worried about filing form 5471, be sure to take a look at the instructions for form 8832. (Yeah, weird IRS logic, I know.) Page 7 of the instructions provides a list of the types of business entities in various countries that are considered corporations for Federal tax purposes. Why this list isn't included with the instructions for form 5471 I'll never know - but it takes much of the worry out of the whole form 5471 hoopla. Form 5471 applies only to "certain foreign corporations" - if your business form isn't considered a corporation then you're off the hook.
> Cheers,
> Bev


Bev,
You are a life saver!

Thinking that I had to file the 5471 forms for this and past years (5 in total), I got the past declarations of my 2 foreign "companies" and proceeded to try to figure out how to do it. But then I decided to check this forum once again...(Procrastinating, you know... )

So I checked page 7 of form 8832 (in this case the instructions are in the same PDF as the form itself...) and found that in Brazil only "Sociedade Anonima" and in Spain "Sociedad Anonima" are considered "Foreign Entities Classified as Corporations for Federal Tax Purposes".

Both corporations are "limitadas", not "anonimas". That means I don't have to file all those 5471????
(I own 49% of one, 50% of the other.)
I guess then the IRS would consider them "partneships", right? They don't make any money. Do I still have to fill any other forms for them, other than the 8938s?

I could kiss you! :clap2:


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## Joppa (Sep 7, 2009)

This thread is two years old, so discussions and replies may not reflect current rules so I advise you to seek independent advice, or put a specific question on Expat Tax forum at Expat Tax - Expat Forum For People Moving Overseas And Living Abroad. I'm closing this thread.


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