Transfers to Foreign Corporations-Form 926
U.S. Code 6038B-Notice of certain transfers to foreign persons requires reporting of transfers of tangible or intangible property to foreign entities under certain conditions. To comply with this requirement, taxpayers must file form 926. Below, we will touch on some key topics on this subject.
Who must file?
According to the Internal Revenue Service (IRS) “a U.S. citizen or resident, a domestic corporation, or a domestic estate or trust must complete and file Form 926 to report certain transfers of property to a foreign corporation that are described in section 6038B(a)(1)(A), 367(d), or 367(e)”. U.S. tax exempt entities are also required to file.
Note that a domestic partnership does not need to file, as a pass-through entity you will need to look through to the domestic partners. With regards to trust, unless the trust is a grantor trust, the trust itself, and not its beneficiaries, is considered to be the transferor and will be required to file.
How to file?
The transferor (person or entity making the transfer) must report the transfer on Form 926 with their tax return, in the tax year in which the transfer took place. It is important to note that the filer may be required to file FINCEN Form 114, Foreign Bank Accounts as well. The transferor may also need to file Form 5471 if they own more than 50% of actual or equitable interest in the foreign corporation as it would be classified as a Controlled Foreign Corporation (CFC).
Penalties
Types of Transfers
There are special rules associated with common transfers made by certain entities.
Transfers by a partnership |
Transfers by spouses |
Transfers of cash to a Corporation |
| In the event the transferor is a partnership, the domestic partners are required to file Form 926. The partnership should include the relevant information in the footnotes to the partners’ K-1. | Spouses filing a joint return may file a joint Form 926 | Transfers of cash by a U.S person whose voting power in the foreign corporation is at least 10% after the transfer is made are required to file Form 926. Keep in mind that transfers that aggregate to $100,000 within a 12 month period will create an obligation to file Form 926. The wording here of a “12 months period” could encompass transfers made in two tax years which would trigger a filing in the year the last payment was made. |
Filing Exceptions
Under certain circumstances a transfer may not need to be reported. Those transfers include but are not limited to exchanges of stock with a foreign corporation for purposes of recapitalization, exchanges of an asset for reorganization purposes, distributions of stock between domestic corporations, a transfer that grants the U.S. transferor less than 5% of the voting power in a foreign corporation. Given the substantive penalties for non-compliance the decision to forgo a filing should be made with the advice of a tax professional.
Conclusion
The reporting of transfers to foreign corporations is heavily regulated by the IRS and it is imperative that the transferor disclose such transfers in a timely and accurate manner. Tax professionals recommend reviewing very closely the footnotes of K-1s received for any indication of such transaction. This is an important step when assisting taxpayers with their tax returns.
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To ensure compliance with U.S. Treasury rules, unless expressly stated otherwise, any U.S. tax advice contained in this communication is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
