Managing Foreign Businesses and Assets After Moving to the U.S.

Relocating to the United States brings significant opportunities, but it also introduces complex legal and financial requirements concerning pre-existing foreign business interests and assets. Proper management is crucial to ensure compliance with U.S. tax laws and reporting obligations, avoiding severe penalties.

Initial Compliance Checklist for New Residents

Upon establishing residency, immediate attention must be paid to reporting foreign financial holdings. Failure to report can result in substantial fines.

Understanding Reporting Thresholds

U.S. persons are required to report specified foreign financial assets if the aggregate value exceeds certain thresholds.

• FBAR (FinCEN Form 114): Must be filed if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.
• FATCA (Form 8938): Reporting requirements under the Foreign Account Tax Compliance Act are generally higher, often starting at $50,000, depending on filing status and residency.

Navigating Foreign Business Ownership

Owning a foreign corporation, partnership, or other entity while residing in the U.S. triggers specific informational filing requirements.

Controlled Foreign Corporations (CFCs)

If a U.S. person owns more than 50% of a foreign corporation, that entity may be classified as a CFC. This classification subjects the U.S. owner to complex inclusion rules, such as GILTI (Global Intangible Low-Taxed Income).

The key compliance form for CFCs is often Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. Accuracy in classifying ownership is paramount.

Passive Foreign Investment Companies (PFICs)

If the foreign entity derives most of its income passively (e.g., investments, royalties), it might be classified as a PFIC. This classification can lead to punitive tax treatment unless specific elections are made, such as a Qualified Electing Fund (QEF) election or a mark-to-market election.

Consider the following options for managing PFICs:

1. File Form 8621 annually to report PFIC income.
2. Ensure proper valuation methods align with IRS standards.
3. Consult an advisor regarding the impact on capital gains calculations.

Tax Implications of Foreign Assets and Income

The U.S. taxes its residents on worldwide income. This means income generated by foreign businesses or assets must be reported on the U.S. tax return.

Foreign Tax Credits and Deductions

To prevent double taxation, U.S. taxpayers can often claim a credit for income taxes paid to foreign governments.

Utilize Form 1116, Foreign Tax Credit (Individual), to claim these credits. Proper documentation of foreign taxes paid is essential for substantiating the credit amount claimed.

Distinction Between Income and Capital

It is vital to distinguish between income earned by the foreign business (taxable immediately) and the repatriation of capital (which generally is not taxed upon withdrawal if the entity was a corporation).

For example, distributions from a foreign corporation are often analyzed under complex rules involving Earnings & Profits (E&P) calculations, potentially utilizing Form 5471 data.

Structuring Future Investments

When planning to retain or grow foreign assets while residing in the U.S., consider restructuring to mitigate future compliance burdens.

Strategies might include:

• Converting foreign entities into U.S. subsidiaries, if feasible.
• Utilizing tax treaties between the U.S. and the source country.
• Establishing trusts or other vehicles compliant with anti-deferral rules.

Conclusion

Successfully managing foreign businesses and assets after moving to the U.S. requires proactive engagement with complex international tax regulations. Early consultation with a tax professional experienced in expatriate and immigrant tax matters is the most effective step to ensure full compliance and optimize tax efficiency.