This week’s episode is from the Brains Across Borders series: Americans doing business using foreign corporations. It’s you, a MacBook Pro, and a foreign corporation.
Remember to file Form 926 when you form a foreign corporation and make a capital contribution. Even cash.
There are plenty of tax reasons to set up and use a foreign (i.e., not formed under U.S. law) corporation. There are also a host of practical reasons to use a foreign corporation to do business.
That’s why I find most American entrepreneurs abroad will set up a corporation or two outside the United States. Many U.S.-based entrepreneurs will set up a foreign corporation, too.
The process involves some government fees, a lawyer, and sometimes an accountant. (Some countries require audited financial statements for corporations.) Documents are filed, fees are paid. Soon a corporation exists, replete with officers and directors.
The first thing the corporation needs is money.
It gets money from people who want to own its stock: shareholders. You become a shareholder by giving the corporation something valuable (cash, usually) and getting a pretty piece of paper (OK, a stock certificate) in return.
That piece of paper says that you own a certain number of shares of stock of the corporation. That is a capital contribution, in legal and tax jargon.
The IRS wants to know what you did. What you did was simple: you bought stock in your own foreign corporation. Form 926 is how you tell the IRS all about this. Why the IRS wants to know is a topic for another day, when we have a heart-to-heart talk about your life in the Land of the FreeTM.
Form 926 requires a U.S. person (a citizen, green card holder, U.S. corporation, etc.) to file anytime there is a transfer to a foreign corporation or foreign partnership.
Let’s talk about cash only. There are two ways that cash can be transferred to a foreign corporation: as a loan or as a capital contribution.
Let’s take the capital contribution route. When you opened the corporation’s bank account, you put money into it from your own pocket and received stock. That is a capital contribution. It must be reported on Form 926.
But there is another way you can trigger a reporting requirement for Form 926. Quite often, shareholders will loan–or intend to loan–money to their corporations. But they never get around to doing the paperwork to show it is a loan.
A true loan is not a transfer to the corporation. By failing to take care of the details, you can cause a loan to be treated as a capital contribution, and thereby create a reportable event for Form 926.
I want you to remember that you file Form 926 anytime you transfer property to a foreign corporation. More cash, a domain name, a computer, a building. Many times you will arbitrarily move an asset to a corporation (what would be easier than changing the registration for a domain name from your name to your new corporation?) and this will trigger a filing requirement.
But the biggest problem I see is the casual way in which funds are “loaned” to a corporation but the paperwork never catches up. If you want to make a loan to your foreign corporation, prepare resolutions to be approved by the Board of Directors, and have the corporation’s officers sign a promissory note promising to pay you back.
Remember that the IRS is hinky about about anything outside the United States. The initial assumption is that you are evil, not sloppy. They have massive penalties with which to threaten you. I’m not saying that penalties will imposed.
I’m just saying you put yourself at risk–the random quirks of the random individual working for the government will control your destiny.
I have only identified cash contributions to a foreign corporation. It is expansive: it applies to foreign partnerships, it applies to corporate reorganizations and other transactions. Take care.
Here is a quote from a major tax treatise that gives you a hint of how big an iceberg you are dealing with when you contemplate the majesty that is Form 926:
The information requests in Form 926 are designed to give the IRS a road map to police the taxpayer’s compliance with the outbound transfer rules of §367(a). The regulations under §6038B cross-reference the §367(a) regulations substantially, and it is extremely helpful for anyone undertaking completion of Form 926 to have at least some familiarity with the basic principles of §367(a) and its regulations. Because §367(a) in turn builds on Subchapter C, successful completion of Form 926 for a transaction requires either a detailed understanding of how the transaction is classified under Subchapter C (including potential alternative classifications) or assistance from someone else who does (ideally, the planners of the transaction).
This is from Blum, Canale, Hester, and O’Connor, 947 T.M., Reporting Requirements Under the Code for International Transactions, §IV(B)(1). Also known as one of the BNA tax portfolios.
Don’t go cowboy. A foreign corporation is exceedingly useful and operated properly you are safe and will help you save tax–legally.
Think of your foreign corporation like a Ferrari when it comes to the U.S. tax rules. Go to the Ferrari mechanic for maintenance. Your domestic corporation is a Chevy and can be repaired almost anywhere.
Insert the usual disclaimer here. This is not legal advice, etc. etc. Go find someone to help you with this stuff.