Australia PTY Limited US Tax Treatment
Australia PTY Limited US Tax Treatment: When it comes to Australia, the IRS, and U.S. tax common issues include the Superannuation, FBAR & FATCA, and Form 8833 tax treaty analysis. But, another common issue is how to treaty a PTY limited for U.S. tax and reporting. A PTY Limited (Proprietary Limited Company is a very common entity structure in Australia (and South Africa), especially for small to mid-size business. A PTY (Proprietary Company) is a privately held company that can be used for many different purposes, and can be considered equivalent in many regards (but not all) to an S Corporation, LLC and/or Limited Partnership. The PTY is limited to 50 Shareholders and cannot be used for fundraising purposes.
Structure of the Australia PTY Limited
The PTY Limited resembles the S Corp. in that it limits the number of shareholders to 50 (U.S. ‘S Corp’ is limited to 100). Moreover, similar to a Limited Partner in a Partnership (as opposed to a General Partner) personal liability is limited to the amount of investment. Additional requirements include that at least one Director who resides in Australia.
Unlike other common foreign entity structures such as an Sociedad Anonima, the PTY “Limited” is not identified in IRC (Internal Revenue Code) 301 as a foreign entity that cannot be disregarded for tax purposes (see below); in other words, you can generally disregard the entity.
Reporting the PTY Ltd. Earnings in the U.S.
If you have income from the foreign company, then you generally will report the income on your tax return.
This may be impacted by the level of ownership, the type of operation (passive or active) and/or whether the company is considered a CFC (Controlled Foreign Corporation) and Subpart F Income rules.
If it is a controlled foreign corporation, the IRS has more stringent rules regarding the reporting of income — especially when it involves “passive” income.
Disregarding the Australia PTY Limited & US Tax Treatment
One alternative that many individuals may consider is to disregard the entity.
In the United States for example a one or two person LLC (depending on the state) may be able to disregard the entity when filing a U.S. Tax Return. Even the IRS understands that business reporting can be intense — especially for a small business who formed the entity for legal protection and non tax purposes.
When an entity is disregarded — while the business entity still remains intact for legal purposes (lawsuit protection) — the taxpayer can disregard the entity and flow the income through to the tax return on a schedule C.
Here is a typical example: David owns a rental property in Australia. The property is being held in a PTY, and once the income from the property is offset from the expenses, there is a very small gain. Instead of reporting all the financials, etc. of the company (IRS reporting a foreign business can be very intense), David can simply disregard the entity (filing the necessary forms during the initial year and possibly an annual reporting form if David owns 100% of the company), run the calculations directly through his tax return (Schedule C or E) and pay any additional income (if any is due) at the time he files the Tax Return.
*There may be other forms that may need to be filed in disregarding the entity about that that is something to be determined on an individual basis.
IRC 301 does not Exclude a PTY Limited
Internal Revenue Code section 301 provides a list of different foreign corporations which are not eligible to be disregarded; in other words, they must be reported as full corporations with complete reporting on the proper corporate forms (5471 or 8621). The Australia PTY Limited not identified on that list and therefore may still apply for disregarding the entity treatment.
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