& LLCs
By Vernon K. Jacobs, CPA
& J. Richard Duke, J.D., LLM
| Foreign
Partnerships
& LLCs By Vernon K. Jacobs, CPA & J. Richard Duke, J.D., LLM |
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A foreign limited liability company (LLC) will be treated as a foreign corporation unless the owners elect to be treated as a foreign partnership. A single owner foreign LLC can elect to be treated as a 'disregarded' entity for U.S. tax purposes.
Any references herein to a foreign partnership apply equally to a foreign limited liability company (LLC) with more than one member if the LLC has elected to be treated as a foreign partnership.
Before 1998, transfers of property to a foreign partnership by a U.S. person were to be reported on Form 926. Until the Tax Relief Act of 1997 (TRA97), transfers of appreciated assets to a foreign partnership in exchange for a partnership interest were subject to an excise tax of 35% of the unrealized gain. However, the taxpayer could elect to pay a capital gains tax on the unrealized gain. When the top rate on capital gains was reduced to 20% by the TRA97, it was obvious that the 35% excise tax was no longer needed - so it was repealed. At the same time, the law was changed to impose reporting requirements on U.S. partners in a controlled foreign partnership similar to the reporting requirements for grantors of a foreign trust and U.S. shareholders of a controlled foreign corporation.
As of october 9, 1998, the IRS released a DRAFT version of a new form 8865 for U.S. partners in a controlled foreign partnership. The form combines most of the reporting requirements of the U.S. partnership form 1065 and the form 5471 for shareholders of a controlled foreign corporation. The form is nine pages long - excluding attachments. The instructions are 10 pages long - in fine print. The return (or portions of it) are required to be filed by the U.S. partners with their personal tax return.
The form is required to be filed by any U.S. person who owns 10% or more of a controlled foreign partnership (CFP). A CFP is a partnership formed outside the U.S. where five or fewer U.S. partners own 50% or more of the partnership interest. However, only those partners with a 10% or greater interest are included in the more than 50% control test.
A foreign (non U.S.) entity with any U.S. owners will be classified by the IRS as a partnership only if there are two or more partners and the partners do not have limited liability from the entity. If a foreign entity has limited liability, it will be treated as a corporation and subject to the foreign corporation filing requirements -- unless it elects a different status.
If a foreign partnership becomes a shareholder of a controlled foreign corporation, then the U.S. partners may be treated as U.S. shareholders of a controlled foreign corporation if their direct and indirect ownership of the corporation is 10% or more of the total outstanding stock of the corporation or when the partnership acquires or disposes of 5% or more of the outstanding stock of a foreign corporation. The partners will then be required to file form 5471.
If a U.S. partner of a foreign
partnership, that is a shareholder of any
foreign investment company, the U.S. partners will then be required to
file
form 8621 which is required for shareholders of a passive
foreign investment company if the U.S. partners want to avoid a
punitive tax on future distributions.
If a foreign partnership with any U.S. partners transfers property, directly or indirectly, to a foreign trust, the U.S. partners may each be required to form 3520 or form 3520-A .
If the foreign partnership receives $10,000 or more in cash payments from one transaction or any series of related transactions, the U.S. partners may be required to file form 8300.
If the foreign partnership has any gross income that is effectively connected with a trade or business in the U.S. and the partnership makes payments to any foreign partners, then the partnership may be required to withhold taxes on the amounts paid to the foreign partners as required by IRC section 1446 and to file forms 8804, 8805 and 8813.
If the foreign partnership has an interest in any foreign accounts with an aggregate value of more than $10,000 at any time during the taxable year, the partnership (or the partners) may be required to file form TD F 90-22.1.
If the foreign partnership is required to pay income taxes to any foreign countries, the U.S. partners may be eligible for a foreign tax credit for their share of the foreign taxes paid by the partnership. The tax credit is claimed with form 1116 for U.S. individuals or form 1118 for U.S. corporations.
An extensive report on the asset
protection and tax aspects of
domestic and foreign LLCs written by Christopher Riser is available on
our paid subscriber's web site (at no added cost) or as a printed report to non-subscribers..
| The preceding comments are a very brief and non-technical summary of the key tax rules that apply to a person who is a citizen of another country and is not a permanent resident of the U.S. This information is an excerpt from Offshore Tax Strategies, by Vernon Jacobs and Richard Duke. |
| About the authors:
Vernon Jacobs is a CPA who provides tax
accounting and consulting services for clients with international
interests. J. Richard Duke,
JD,
LLM is an attorney who specializes in international tax law and is an
Adjunct Professor of international tax law. 
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