A Sociedad Anonima Per Se Corporation, 5471 & GILTI Problem

The Sociedad Anonima for U.S. Tax Purposes

Most U.S. taxpayers who have ownership of a foreign entity that is similar to a U.S. SMLLC (Single-Member LLC) have the opportunity to disregard that entity and treat it as individually owned for U.S. tax purposes. This will usually make annual IRS reporting much simpler. That is because if the entity is an SMLLC-equivalent owned by a U.S. Person then it would typically be considered a controlled foreign corporation which requires the taxpayer to file Form 5471, as well as assess if Subpart F income and GILTI comes into play. If the entity is disregarded, the Taxpayer can file the much simpler form Schedule C. And while many foreign entities can be disregarded for U.S. tax purposes, it is not so easy for taxpayers who live in countries such as Argentina, Brazil, and Chile — since oftentimes the entity is a Sociedad Anonima, which cannot be disregarded under U.S. tax law. Let’s take a brief look at what happens when the taxpayer has a foreign entity that cannot be disregarded.

Which Countries offer the Sociedad Anonima?

Several different foreign countries throughout South America and Europe  offer the suicide that anemia as a way to form an entity for either business or estate planning purposes

• • • Argentina, Sociedad Anonima

    • Bolivia, Sociedad Anonima

    • Brazil, Sociedade Anonima

    • Chile, Sociedad Anonima

    • Colombia, Sociedad Anonima

    • Costa Rica, Sociedad Anonima

    • Ecuador, Sociedad Anonima or Compania Anonima

    • El Salvador, Sociedad Anonima

    • Guatemala, Sociedad Anonima

    • Honduras, Sociedad Anonima

    • Mexico, Sociedad Anonima

    • Morocco, Societe Anonyme

    • Panama, Sociedad Anonima

    • Paraguay, Sociedad Anonima

    • Peru, Sociedad Anonima

    • Portugal, Sociedade Anonima

    • Spain, Sociedad Anonima

    • Uruguay, Sociedad Anonima

    • Venezuela, Sociedad Anonima or Compania Anonima

Is it an Income Producing Entity?

If the asset is an income-generating entity, it begins to get more complicated because the taxpayer may be paying taxes through the foreign entity instead of as an individual impaired by doing so, which will impact how the taxpayer may be able to take deductions in the United States on their tax return and whether issues such as GILTI may apply. Also, whether or not the income from the entity was distributed to the Taxpayer (and/or qualifies as GILTI or Subpart F income) will determine whether the tax implications warrant disregarding the entity.

Is it a CFC?

A CFC is a controlled foreign corporation which means that U.S. person shareholders each own more than 50% (attribution rules apply). If the entity is not owned more than 50% by U.S. persons then it is not a controlled foreign corporation — and issues such as GILTI, Subpart F may not apply. But if it is a controlled foreign corporation, then taxpayers should assess the entity selection carefully due to the tax implications and reporting headaches of having a CFC.

Is it PFIC (PFIC/CFC Crossover)?

Even if the asset is not considered a controlled foreign corporation comma it may be considered a Passive Foreign Investment Company — depending on which assets are passive and which assets generate income and the type of income generated (passive or active).

Are Taxes Paid Overseas?

The Taxpayer may be able to claim foreign tax credits on income generated from the entity. Whether the foreign income tax is paid by the individual or by the entity will determine how the foreign tax credits may be claimed in the United States.

Disregarding the Entity (Non-Income Producing)

If the entity is not income-producing then there may not be any negative tax implications for disregarding the entity — and it can simplify the annual reporting requirements. This is especially true in situations in which the property is simply a primary or secondary residence that’s not used to generate income.

Disregarding the Entity (Income Producing)

If the property is income-producing, then there are more considerations such as whether it is a controlled foreign corporation, whether the income qualifies as GILTI or Subpart F, and whether the taxpayer has paid any foreign taxes on the income in the foreign country where the entity is located. Ideally, taxpayers should conduct a U.S. tax analysis before they form an entity, but that is not always feasible. Whether the property is owned individually or by an entity will also impact the application of the primary residence exclusion rule if the property is being used as a primary residence.

Revenue Procedure 92-70

If the taxpayer cannot disregard the entity, they may consider reporting the entity as a dormant corporation. The requirements can be found under Revenue Procedure 92-70. Unfortunately, due to the global surge in real estate prices, it may be difficult for the taxpayer to qualify as a dormant corporation.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.