Ownership of foreign entities

If a U.S. taxpayer owns a foreign entity, the income of that foreign entity may be subject to immediate U.S. taxation. Corporations are no exception to the rule.

There are three schemes for reporting foreign subs that are more than 50% owned by the corporation:

1.            CONTROLLED FOREIGN CORPORATIONS. Form 5471 is filed on an annual basis with the corporate U.S. tax return. A substantial amount of information is reported on this form,

including a balance sheet, income statement, related party transactions, detailed analysis of the historical retained earnings, and various other disclosures. The statements are converted to GAAP, and then the U.S. tax rules are applied to the net earnings as a U.S. entity.

The net income of controlled foreign corporations can be taxed at the U.S. parent level at a special low rate, currently 10.5% (going to 13.125% after 2025). This tax is called GILTI (Global Intangible Low Tax Income). The U.S. corporation gets a credit at 80% of the taxes paid in the foreign country.

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