A Foreign Holding Company may seem like a good way to aggregate multiple foreign assets and investments into a single holding company — but to the IRS it can spell trouble.
It is a very common scenario: a person has multiple investments in foreign companies, stocks, bonds, rental property, etc. and it can get very overwhelming to have multiple LLCs and foreign companies to hold the assets – especially across multiple borders.
As a result, the person moves all of the assets into one company and that company is the owner of all of the foreign investment; in other words, it “holds” the investments.
Taxes and Income
In many countries, a holding company is exempt from tax. These countries are generally considered “offshore tax havens” where individuals will form a holding company as a nonresident, for the sole purpose of holding investments. Technically, the purpose of the holding company is to oversee and manage the investment portfolio.
Since the business is not “operational” and is merely just “holding” the foreign assets, some countries have exemptions and exclusions in place to avoid tax liability — which is used to entice foreigners to invest in that country. As you can imagine, the IRS highly frowns upon this practice.
That is because from the IRS’ perspective, it does not really matter if you have five foreign investments lumped together into a single foreign holding company. In actuality, if you have five foreign investments and they have their own account numbers (read: Foreign Mutual Funds or Securities Investments) and/or are earning income, then you have to report the investments and pay tax on that income – despite what your foreign investment planner may have told you (unless certain elections were made).
*There may be some exemptions and exclusion depending on the particular holding company, the country of origin of the holding company, the types of investments, and whether there is a tax treaty without specific country. Nevertheless, the default position should be you have to pay US tax unless an exclusion or exception applies.
PFIC – Passive Foreign Investment Company
A PFIC is a Passive Foreign Investment Company. We have written numerous articles on this very complex area of law but as a very brief summary, depending on the value of the holding company that is based on passive investments and/or the amount of income generated from passive investments, the United States may consider your holding company a PFIC. It also includes Foreign Mutual Funds.
If the company is considered a PFIC, then there are some very serious reporting requirements necessary an annual basis to ensure the company is in compliance with US tax law. The reason the IRS frowns upon these types of companies is because often times the companies are used to hide, or shift income which would otherwise be taxed regularly under US tax law.
If you believe your company may qualify as a PFIC, it is very important to speak with experienced offshore disclosure attorney to evaluate the facts and circumstances of your situation. For more information on PFIC, please click here.
An FBAR aka (FinCEN 114) is a Report of Foreign Bank and Financial Account form. It is required to be filed when a person has an annual aggregate total of foreign accounts (bank accounts, investment accounts, retirement accounts etc.) that in total (not per account) exceeds $10,000 at any time during the year.
Depending on the total amount of money you have in foreign accounts, you may also have the file an IRS “FATCA” Form 8938 (Statement of Specified Foreign Assets). Unlike the FBAR which is reported electronically and directly to the Department of Treasury, the 8938 is filed directly with your U.S. tax return.
The threshold requirements for having to file and 8938 or higher than an FBAR, and will be determined by whether you file single or married filing jointly and /or whether your residence is within the United States or a foreign country.
Reporting Foreign Income and Accounts – The Basics
Offshore disclosure is a complex area of law. To that end, many clients of ours have many of the same issues, questions, or concerns regarding their failure to report and/or be in compliance.
Golding & Golding: About our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.