The United States is one of the most aggressive and intimidating taxing authorities in the world. Therefore, people working or conducting business in the U.S. may be surprised at the extent and reach of the IRS and California taxing authorities. Foreign entities conducting business in the U.S. and expatriates working in the U.S. must properly report U.S. activities for U.S. tax purposes and adhere to the reporting requirements related to any U.S. assets and income. Additionally, there are information reports that must be filed to avoid severe penalties.
Many of the rules are made to encourage inbound investment. If there is proper planning and reporting, there is nothing to fear when participating in the largest economy in the world. Hone Maxwell LLP works to ensure clients’ compliance with all U.S. and state tax filing and reporting obligations.
U.S. corporations that are owned at least 25% by a foreigner and have certain transactions with that foreign owner must file a Form 5472. There is an itemized list of transactions that qualify for reporting, but some are so broad it can appear that every financial transaction must be reported. In addition, the penalty on Form 5472 increased in 2018 to $25,000 a year. With effective counsel and planning, costly penalties can be avoided.
U.S. Tax Treaties
While many tax treaties with various foreign countries allow for reduced tax rates or exemptions from U.S. income taxes, they apply differently depending on the taxpayer’s status. In addition, California does not conform to U.S. tax treaties and considers many factors to determine taxation. Also, due to the “savings clause,” treaties generally only apply to foreigners investing in the U.S. For this reason, very few professionals have experience with taking treaty positions. However, there can be some great tax benefits from utilizing a tax treaty.
Non-American individuals and businesses must submit W-8 forms to be compliant with the Foreign Account Tax Compliance Act (FACTA). Also, some Americans must verify when they are paying foreigners or foreign businesses. The series of W-8 forms are used to certify a foreign taxpayer. The forms can also be used to take a treaty position. HMLLP provides skilled counsel on which documents are required, helping avoid costly noncompliance and complications dealing with financial institutions.
Choice of Entity
In the U.S. there are several entity types that foreigners can choose when they set up a business. These all have different legal and tax consequences that must be carefully considered. The application is fact specific, as how each taxpayer chooses to use their business and receive income could change which option is best.
Proper preimmigration planning helps minimize income taxes and estate taxes when done properly before obtaining U.S. status. The options are much fewer once someone is considered a U.S. person for tax purposes. Preimmigration planning also helps protect assets and avoid disputes that lead to litigation. HMLLP attorneys understand the legal consequences and obligations of immigrating to the U.S., and the many personal and family issues that can arise. This experience allows HMLLP attorneys to give balanced advice that achieves personal goals and facilitates strategic tax and legal planning.