As we have discussed in previous posts, while owning a foreign subsidiary has its advantages, it also presents complicated tax issues. We’ve analyzed the fictional relationship of U.S. Parent and foreign Sub and discussed the check the box rules, transfer pricing considerations, and Form 5471. While these are some of the main issues associated with acquiring a foreign subsidiary, there are countless other tax implications that need to be considered. We’ll briefly touch on some of those issues in this last post of the series.
In order to operate in a foreign country, Sub will most likely need to open a bank account in that country. If that bank account (or a combination of Sub’s foreign accounts) reaches the equivalent of $10,000 USD at any time during the tax year, this will trigger a filing requirement for Parent.
Form 114, Report of Foreign Bank and Financial Accounts, is required for all U.S. taxpayers who have a financial interest and/or signature authority over accounts in foreign countries that exceed $10,000 USD. Since Parent has 100% ownership of Sub, Parent has a financial interest in any foreign account that Sub maintains in its country of operation. This form reports the highest balance of each bank account during the tax year.
Another possible reporting requirement is Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Generally, this form is required to be completed if a U.S. citizen or resident, a domestic corporation, or a domestic estate or trust transfers cash or property to a foreign corporation. In regards to transfers of cash, the transfer must be reported if immediately after the transfer the U.S. person holds at least 10% of the total value of the foreign corporation’s stock or if the total cash transferred during the year exceeds $100,000. In our example, Parent would need to file this form.
While some of the reporting requirements include forms that need to be filed either with the parent’s U.S. tax return or separately, there are also requirements that include schedules that need to be prepared within the parent’s tax return. One of these schedules is Schedule N, Foreign Operations of U.S. Corporations. This form must be completed by a corporation that at any time during the tax year had assets in or operated a business in a foreign country. The form generally contains yes-or-no questions that aid the taxpayer in determining which forms to include with its return. In our example, Parent will need to complete this form with its U.S. tax return.
In in this blog series we have discussed some of the issues and informational reporting requirements associated with the ownership of a foreign subsidiary. Other considerations include whether the income of the foreign subsidiary is required to be included on the parent’s U.S. tax return (the sub-part F rules), whether the U.S. parent can claim any foreign tax credits if income is includable, and whether there is a tax treaty with the foreign country in which the subsidiary is operating.
To conclude, there are numerous filing requirements and complex tax issues that arise after a company has acquired a foreign subsidiary, and while owning a foreign subsidiary has many advantages, it is important to consult with your tax advisor to determine which additional filing requirements will now be required and to evaluate any other U.S. tax implications. It is also critical to obtain competent tax counsel in the foreign country (or countries) in which the subsidiary is operating.