No matter where you live in the world, if you are an American citizen, you have to file federal taxes on your worldwide income each year. International tax treaties or foreign tax filing requirements do not allow you to be exempt from your federal tax returns each year.
Expats are able to claim some foreign tax credits as well as claiming provisions for tax exclusions related to where they are residing.
What is a CFC?
A CFC is a controlled foreign corporation that operates overseas. To be a CFC, a foreign business must have 50% or more American shareholders, or be at least 50% American controlled. This kind of foreign company must file Form 5471 every year. If your business is an LLC, you will instead file Form 8832 or Form 8858. These forms will allow your LLC to file s a single-owner LLC taxes despite it being abroad.
If you own at least 10% of an CFC, you will have to treat a proportion of the as GILTI (Global Intangible Low Tax Income). This is taxed at 10.5% currently and might be increased in the coming years.
What is a PFIC?
This is an acronym for a Passive Foreign Investment Company. This is a registered corporation that makes at least 75% of its income from passive sources. These are taxed at a higher rate than normal income and reported on Form 8621. Most experts do not recommend investing in PFICs for expats.
Foreign Bank Account Reporting
If you have over $10,000 in total in your foreign bank and investment accounts, you will need to do an FBAR filing. The foreign banks report this information too, so the IRS may reach out to you if you do not file.
Conclusion
Expats with foreign companies must decide if these companies are CFC or PFIC entities and file the right forms each year to the IRS. This is normally done on Form 5471, Form 8858, or Form 8621. If you have foreign bank or investment accounts, you may need to file an FBAR and Form 8938.
US filing from abroad is required by law and you will not be able to avoid it just because you are not living in the US at this time. Making errors in these filings can lead to expensive back tax or penalty bills that are well-worth avoiding.
