Owning a Foreign Company as a U.S. Expat — IRS Rules
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Owning a foreign company as a U.S. person — a limited company in the U.K., a GmbH in Germany, a Pty Ltd in Australia, an S.A. in Panama — brings U.S. information returns and, in many cases, U.S. tax on the company's income even if nothing is distributed. The rules were written for multinationals; they apply equally to a one-person consultancy abroad.
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Which form do I file for my foreign company?
It depends on how the U.S. classifies the entity, which may differ from how the local country sees it:
- Form 5471 for a foreign corporation in which you own enough shares — generally 10% or more, with more detailed schedules if U.S. persons together own more than half (a controlled foreign corporation).
- Form 8858 for a foreign disregarded entity — a single-owner company you've elected to treat as transparent for U.S. purposes, or that is transparent by default.
- Form 8865 for a foreign partnership with multiple owners.
Each is an information return attached to your Form 1040, due with it, and carrying a penalty per form per year for late or incomplete filing — one of the largest flat penalties in the code, with no requirement that any tax be owed.
Will I be taxed on the company's profit before I take it out?
Often, yes. If the company is a controlled foreign corporation — more than 50% owned by U.S. persons, which a one-owner company always is — then much of its income is taxable to you currently under the subpart F and net CFC tested income rules (formerly global intangible low-taxed income), whether or not it's distributed. Service and consulting income usually falls squarely within these rules. There are offsets, but for an individual they come mainly through an election under Section 962 to be taxed on the inclusion as if you were a corporation: it unlocks a deduction for part of the inclusion and credits for corporate tax the company paid, which can reduce the rate. None of this is automatic.
Can I elect to treat the company as transparent?
For many single-owner foreign entities, yes — a "check-the-box" election on Form 8832 makes the company a disregarded entity for U.S. purposes. The result: the company's income lands directly on your Schedule C, you file Form 8858 instead of 5471, the controlled-foreign-corporation rules fall away, and the foreign earned income exclusion and foreign tax credit apply to the income as yours. The trade-off is self-employment tax, which the corporate structure avoided, unless a totalization agreement covers you. The election is usually made when the company is formed; electing later can trigger a deemed liquidation.
Does a foreign company help with U.S. tax?
Rarely for a small service business, and often the reverse. What people hope for — leaving profit in the company untaxed — is exactly what the controlled-foreign-corporation rules prevent. What they get is an extra information return, possible current taxation, and a compliance cost that can exceed the saving. A foreign company makes sense when local law requires it, when there are non-U.S. co-owners, when the business has real local substance and employees, or when limited liability matters more than the tax friction.
What else comes with a foreign company?
- FBAR for the company's bank accounts if you have signature authority or own more than half; your shares in the company are themselves a specified foreign asset for Form 8938.
- Transfer pricing if the company deals with you or a related U.S. business.
- Form 5472 going the other way, if a foreign person owns a U.S. company.
- Local corporate tax and filings in the company's country — handled locally, coordinated with the U.S. return.
Frequently asked questions
I'm the only shareholder and it's a tiny company. Do these rules really apply?
Yes. Size is irrelevant; ownership is what counts. A one-person company is a controlled foreign corporation by definition.
I never filed Form 5471 for years. What now?
There is a specific IRS procedure for late international information returns with a reasonable-cause statement, and the Streamlined procedures cover them too. The penalties are large enough that this should be fixed deliberately.
Does the foreign earned income exclusion apply to my salary from my own company?
Yes — salary you pay yourself for work performed abroad is foreign earned income. Dividends and undistributed profit are not.
Would a U.S. LLC be simpler?
For a U.S. citizen abroad, a U.S. LLC is domestic, files no 5471, and its income is yours on Schedule C — but the local country may tax and regulate it as a foreign company operating there. Model both sides.
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. If you own or are about to form a company abroad, our team can work through which forms apply, whether the income is taxed now, and whether the structure is worth it. See pricing or book a free fit call.
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