U.S. Taxation of a Sociedad Anonima (IRS Reporting S.A. Ownership)
When it comes to reporting foreign businesses (with U.S. ownership) in the United States and paying tax on foreign earnings, it can get very complicated.
That is because there are hundreds of different countries that each have their own individual set of rules and regulations.
When a person is a U.S. Citizen or Legal Permanent Resident (or otherwise subject to US tax) they also have to meet foreign account reporting and tax requirements for their foreign business.
*While reporting the S.A. is almost always required, taxation may be impacted by CFC vs. Foreign Corporation, GILTI, and other international tax related issues.
The focus of this article will be the Sociedad Anonima and the tax impact in the United States – with an emphasis on the Streamlined Program.
Sociedad Anonima – Conducting Small Business
A Sociedad Anonima is a very common business structure overseas. Tens of different countries use the Sociedad Anonima in many different ways. For example, the Sociedad Anonima is oftentimes used as the equivalent of a US small business. A common example would be if a person relocates to a country such as: Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Peru, Portugal, Spain, Paraguay, or Venezuela and wants to purchase and rent real estate.
In these countries, for ease of reporting most people would typically purchase the property through a Sociedad Anonima and/or place the property into an “S.A.”
Sociedad Anonima – Foreign Estate Planning
In many of these same countries, there is a dual purpose for the Sociedad Anonima, and that is for estate planning purposes. The Sociedad Anonima is used to facilitate the transfer of wealth from one individual to the next by placing the assets into the Sociedad Anonima. In the United States, the Sociedad Anonima would be somewhat equivalent to a trust, in which the property is held in trust, managed by the trustee and based on the terms of the trust, distributed to the beneficiaries either now or in the future.
How the IRS views the Sociedad Anonima
The Internal Revenue Service has certain foreign businesses that designates per se corporations. If a foreign company is deemed a per se corporation under Internal Revenue Code section 301, then unless an exception applies, the foreign entity will be considered to be a U.S. corporation. The foreign company will not have the opportunity to “disregard itself as an entity for tax purposes.”
Here’s an example: In the United States, if a single person owns an LLC (a.k.a. limited liability company) they usually have the opportunity to disregard the entity for federal tax purposes. In other words, the entity still exists to provide legal protection to the owner, but the owner has the opportunity to flow that income through the business and directly to the owner and the reported directly on the 1040 tax return – usually through a schedule C. Many foreign companies will qualify for this treatment, and therefore avoid the very complicate business reporting on forms such as a 5471.
Companies that are termed per se corporations for tax purposes do not have the opportunity to disregard. As such, the Corporation is reported as a foreign corporation and therefore must be reported on a US tax return on either a 5471, 3520, 3520-A or 8621.
IRS Non-Compliance – More Forms, More Penalties
Due to the fact that they are very specific reporting requirements for a Sociedad Anonima, many people are unaware of the fact that certain forms must be reported with respect to the foreign company. Depending on the type and use of the foreign company, it may require the filing of forms such as a 5471 for an active business, 8621 for a passive business, a 3520 certain distributions and gifts received by the company, and/or a 3520-A as the owner of a foreign trust.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.