Form 8858 filing requirements: Updates for owners and operators of foreign entities

In a significant change to previous U.S. international tax reporting requirements, U.S. persons are now required to file Form 8858: Information Return of U.S. Persons with Respect to Foreign Disregarded Entities and Foreign Branches. Filing must be done for operations of true foreign branches (FBs), including qualified business units (QBUs), as well as foreign disregarded entities (FDEs).

Previously, Form 8858 was required only for FDEs. Now, certain U.S. persons who operate an FB or own an FDE directly, or, in certain circumstances, indirectly or constructively, are required to file the form.

There’s a $10,000 penalty for each instance Form 8858 isn’t filed on time. If the IRS notifies the U.S. person of failure to file and it remains unresolved, the penalty could be multiplied.

Background

An FDE is an entity that isn’t organized in the United States and is disregarded as an entity separate from its owner for U.S. income tax purposes. An FB generally exists when an integral business operation is carried out by a U.S. person or a controlled foreign corporation outside the United States, but no separate foreign legal entity has been created to hold the business operation. An FB is defined in Treasury Regulation Section 1.367(a)-6T(g).

Generally speaking, it’s the responsibility of the FDE or FB tax owner to annually file Form 8858. This could be the person who’s treated as owning the assets and liabilities of the FDE or FB for purposes of U.S. federal income tax.

Because FBs were formerly considered fully integrated within a U.S. person’s operations — and already included within the U.S. person’s tax net — identifying the existence of an FB wasn’t critical for U.S. tax compliance purposes. The new filing requirement necessitates that tax owners analyze international operations and determine whether and where FBs exist.

Notable changes

At a glance

There are three notable changes to Form 8858 filing requirements for tax owners:

• All true foreign branches are now required to file Form 8858.
• All Form 8858 filers must also file Schedule M to report related-party transactions.
• Due to the many new schedules, filers will need to request information similar in scope to the Form 5471 information request.

Required for foreign-branch activity

Prior to tax year 2018, only U.S. tax owners of FDEs were required to file Form 8858. However, due to the changes implemented through the 2017 tax reform reconciliation act, commonly referred to as the Tax Cuts and Jobs Act (TCJA), U.S. tax owners operating FBs must also file Forms 8858 starting in 2018.

FB qualifying activities

A tax owner could be deemed to have an FB if there’s evidence for any of the following criteria:

• A separate set of books and records
• An office or other fixed place of business used by employees or officers of the U.S. person to perform business activities outside of the United States
• Foreign tax returns filed by a U.S. company

In each of these circumstances, the tax owner would be required to file a Form 8858.

Activities outside of the United States will constitute an FB if the activities qualify as a permanent establishment under the terms of a treaty between the United States and the country where the activities are carried out.

Any U.S. person — including entities such as corporations, partnerships, trusts, or estates — may be treated as owning an FB. A foreign subsidiary conducting business outside of its home country would also be considered an FB.

Qualified business units

An FB includes a qualified business unit (QBU) as defined in Treasury Regulation Section 1.989(a)-1. This definition is similar to the definition for dual consolidated loss purposes.

Given this expanded scope, tax owners may need to provide additional information regarding possible FB activities, such as business activities the U.S. company is performing abroad when no separate legal entity exists. A $10,000 penalty is automatically assessed in multiples for the number of forms, branches, and years a required Form 8858 isn’t filed.

Required for related-party transactions

Previously, only FDEs owned by a controlled foreign corporation were required to report related-party transactions on Schedule M of Form 8858.

Now, Schedule M must be filed with each Form 8858 if the FDE or FB entered into any transaction with the filer or other related entities during the annual accounting period of the FDE or FB. Amounts disclosed on Schedule M must be reported in U.S. dollars.

Expanded reporting schedules

Due to the expanded scope of Form 8858 and additional filing obligation for FBs, the form reporting schedules have also expanded the required reporting of income, informational questions, and intercompany transactions.

This means a tax owner may need to provide tax preparers with more information than previously requested.

Documents for tax preparers

• Schedule C-1. This document was changed to address new regulations, known as branch functional currency rules, under IRC Section 87.
• Schedule G. This document was updated to add informational questions related to new international tax provisions from the TCJA.
• Schedule I, Transferred Loss Amount. This is a new revision that reflects FB loss rules under IRC Section 1, which was also introduced by the TCJA.
• Schedule J, Income Taxes Paid or Accrued. This is a new revision that allows tax owners to report income taxes paid in the local jurisdiction by the FDE or FB.