Becoming a U.S. green card holder comes with many opportunities but also brings a new set of tax responsibilities that you may not be familiar with—especially if you own shares in a company back in your home country. The U.S. taxes its residents on worldwide income, meaning that your foreign investments, dividends, and ownership in businesses abroad now fall under the scrutiny of U.S. tax laws. Understanding these obligations is essential to avoiding costly penalties and ensuring you comply with U.S. tax requirements.
This article focuses on the key tax implications for new green card holders who own shares in foreign companies, including reporting obligations such as Form 5471, the Global Intangible Low-Taxed Income (GILTI) tax, and how actively managing a foreign business from the U.S. can trigger additional tax liabilities.
Introduction
If you recently became a U.S. green card holder and own shares in a foreign company, you are now considered a U.S. tax resident. As such, you are subject to U.S. tax laws on all income, regardless of where it is earned. This includes income from foreign sources, such as dividends, salary, and profits from any businesses you may own abroad. You will need to meet specific tax reporting requirements, such as filing Form 5471 if you hold significant ownership (generally 10% or more) in a foreign corporation and addressing the GILTI tax on undistributed profits.
This article walks you through your U.S. tax obligations and provides guidance on how to navigate this new landscape.
Key Concepts and Issues
Worldwide Income and U.S. Taxation:
As a U.S. green card holder, you are taxed on your worldwide income, which includes income earned from foreign businesses and investments. Regardless of where your income originates, it must be reported on your U.S. tax return.
Controlled Foreign Corporation (CFC):
A foreign corporation is classified as a Controlled Foreign Corporation (CFC) if U.S. shareholders, including you, collectively own more than 50% of the company’s shares or voting power. This ownership structure subjects the foreign company and its U.S. shareholders to specific tax reporting requirements under U.S. law.
Form 5471 – Information Return of U.S. Persons With Respect to Certain Foreign Corporations:
If you own 10% or more of a CFC, you are required to file Form 5471 annually to disclose your ownership stake in the foreign company. This form is filed with your U.S. tax return and provides the IRS with information on the foreign corporation’s financial activities and your role as a shareholder.
Failure to file Form 5471 or filing it inaccurately can result in penalties, starting at $10,000 per year, so it is critical to ensure this form is completed correctly.
Global Intangible Low-Taxed Income (GILTI) Tax:
GILTI is a tax on the undistributed income of a CFC. As a U.S. green card holder, you are required to report your share of a CFC’s income, even if the company does not distribute dividends. This tax ensures that U.S. shareholders of CFCs cannot defer paying taxes on profits that remain within a foreign company.
Step-by-Step Explanation of Your U.S. Tax Obligations
1. Filing Form 5471:
If you own 10% or more of a foreign corporation, particularly a CFC, you must file Form 5471 each year as part of your U.S. tax return. This form reports your ownership and the foreign corporation’s financial details to the IRS.
For example, if you own 20% of a foreign company, you must disclose your ownership and report relevant financial details on Form 5471. This filing ensures the IRS has transparency into U.S. taxpayers’ foreign holdings.
Failure to file Form 5471 or submitting it incorrectly results in severe penalties, starting at $10,000 per year per missed filing.
2. Reporting Global Intangible Low-Taxed Income (GILTI):
The GILTI tax applies to profits that are retained by a CFC rather than being distributed as dividends. As a U.S. green card holder, you must report your share of the foreign company’s undistributed income and pay U.S. taxes on it, even if you haven’t received any actual payments.
For example, if the foreign company earns $100,000 and you own 20%, your share of the income ($20,000) must be reported and included in your U.S. tax return as GILTI income. This prevents the deferral of U.S. taxes on undistributed foreign earnings.
GILTI is calculated based on the CFC’s “tested income,” which includes the company’s gross income, minus specific deductions. U.S. shareholders are allowed a deduction on their GILTI, but the intricacies of this calculation can be complex. Seeking advice from a tax professional is highly recommended to minimize your tax liability.
3. Salary and Dividends:
If the foreign company pays you a salary or dividends, you must report this income on your U.S. tax return as well. U.S. tax laws require you to declare all income earned from foreign sources, including compensation for services rendered or dividends received.
- Salary: If you receive a salary from the foreign company, it is taxed as ordinary income on your U.S. tax return.
- Dividends: Dividends are taxed either as ordinary income or qualified dividends, depending on various factors, and must be reported accordingly.
4. Permanent Establishment and Effectively Connected Income (ECI):
If you actively manage or work for the foreign company from within the U.S., the IRS may consider the foreign corporation to be conducting business in the U.S. This could result in the foreign corporation being subject to U.S. taxes on its U.S.-effectively connected income. The company might be deemed to have created a permanent establishment in the U.S., which could trigger additional tax filing requirements for the foreign business itself.
For example, if you are running a foreign company from your home in the U.S., using U.S. resources (internet, office space, employees, etc.), the IRS could view the foreign company as having a U.S. presence, subjecting it to U.S. taxes on all or some of its profits.
In such cases, the foreign corporation may need to file Form 1120-F (U.S. Income Tax Return of a Foreign Corporation) to report income effectively connected with a U.S. trade or business.
Strategies to Minimize GILTI and Other Liabilities
- Foreign Tax Credits (FTC): If your foreign company pays taxes on your share of GILTI – in its home country, you can use foreign tax credits (SEE SECTION 962 ELECTION) to offset your U.S. tax liability. This prevents double taxation on the same income.
- Section 962 Election: This allows individual U.S. shareholders of CFCs to be taxed at the U.S. corporate tax rate on GILTI income. It can reduce the overall tax burden in some cases.
- Structuring and Deductions: Properly structuring income and allocating deductions within the foreign corporation can help reduce GILTI and other tax liabilities.
Additional Considerations
Failure to File Penalties:
- Penalties for not filing Form 5471 correctly or on time are steep—$10,000 for each violation per year. Compliance is crucial to avoid these penalties and potential audits.
- The GILTI tax applies even if profits remain within the foreign company. This means that, as a U.S. shareholder, you must ensure you report your share of the CFC’s income, regardless of whether you receive any payouts.
Foreign Business Activities and U.S. Tax Exposure:
- Actively managing or working for the foreign company from the U.S. could trigger additional U.S. tax exposure for the foreign business. It’s important to assess whether your role in the company constitutes effectively connected income (ECI) or a permanent establishment under U.S. tax law, as this could result in further tax obligations for the company itself.
Conclusion and Key Takeaways
As a new U.S. green card holder with ownership in a foreign business, it’s critical to understand your U.S. tax obligations. These include reporting your ownership through Form 5471, addressing the GILTI tax, and ensuring compliance with worldwide income reporting rules. Failure to comply with these requirements can result in significant penalties and unintended tax exposure.
- File Form 5471 to report your ownership in a foreign company.
- Report GILTI income on your U.S. tax return, even if the CFC does not distribute dividends.
- Report salary and dividends received from the foreign company on your U.S. tax return.
- Be mindful of your role in the foreign company, as active management from within the U.S. could trigger U.S. tax obligations for the foreign corporation itself.
If you are a new U.S. green card holder navigating these complex tax obligations, O & G Tax and Accounting Services is here to help. Schedule a consultation with our experienced team today to ensure you remain compliant with Form 5471, GILTI, and other U.S. tax requirements. Book your consultation here.
Additionally, keep in mind the Corporate Transparency Act (CTA) and its reporting requirements. We can assist with filing your beneficial ownership information and ensure your compliance with this important regulation.
