International Tax Series: Be Aware of the Form 8858 Filing Requirement if a U.S. Person Owns a Foreign Disregarded Entity

The Form 8858 is required to be filed if a U.S. person owns 100% of a foreign eligible entity that elects to be classified as a foreign disregarded entity for U.S. federal tax purposes. 

A U.S. person that owns 100% of a foreign disregarded entity is required to file the Form 8858 as a Category 1 filer.  A U.S. person must file the Form 8858 as a Category 2 filer if the U.S. person is required to file the Form 5471 with respect to a controlled foreign corporation (CFC) and the CFC is the tax owner of a foreign disregarded entity. 

A U.S. person must file the Form 8858 as a Category 3 filer if the U.S. person is required to file the Form 8865 with respect to a controlled foreign partnership that is a tax owner of a foreign disregarded entity.

The income statement of the foreign disregarded entity is required to be reported on the Form 8858 in functional foreign currency and in U.S. dollars.  The balance sheet of the foreign disregarded entity is required to be reported on the Form 8858 in U.S. dollars translated from functional foreign currency in accordance with U.S. GAAP.

Certain transactions between the U.S. person filing the Form 8858 (or certain related parties) and the foreign disregarded entity are required to be reported on Schedule M of the Form 8858.

A $10,000 penalty applies for the failure to timely file the Form 8858 or if the Form 8858 is considered to be incomplete or inaccurate when filed.  The Form 8858 is filed with the U.S. filer’s U.S. federal income tax return. 

The $10,000 penalty will apply automatically if the U.S. filer’s U.S. federal income tax return is filed late and the return includes the Form 8858.

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