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Foreign corporations must pay U.S. tax on certain U.S.-source income. Find requirements for filing Form 1120-F U.S. Income Tax Return of a Foreign Corporation.
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What’s a foreign corporation
A foreign corporation is created or organized under the laws of a foreign country or a U.S. territory.
A domestic corporation is created or organized in the United States or under the laws of the United States. A domestic corporation is not a foreign corporation.
An entity’s foreign or domestic status isn’t determined by filing Form 8832, Entity Classification.
More about foreign corporations
Investing in the U.S.
A foreign corporation may invest in the U.S. in several ways.
For example, if it:
- Operates in the U.S. without setting up a new legal entity (for example, setting up a branch in the U.S.)
- Owns stock in a U.S. publicly traded corporation
- Creates a privately held U.S. subsidiary corporation
- Invests in a publicly traded or privately held interest in a U.S. partnership
- Owns an interest in a U.S. limited liability company (LLC), which could be a corporation, a partnership or a branch, for U.S. tax purposes
- Acquires or sells an interest in U.S. real estate, other than an interest solely as a creditor
- Lends money to a U.S. borrower
These investments may result in dividend payments to foreign shareholders or the requirement to file Form 1120-F.
Who must file
Depending on its activities during the year, a foreign corporation must file Form 1120-F, U.S. Income Tax Return of a Foreign Corporation to report income, gains, losses, deductions, credits, and to figure U.S. income tax liability.
A foreign corporation must file Form 1120-F if, during the tax year, if it:
If a foreign corporation owns and operates a business in the U.S. selling services, products or merchandise, and those activities in the U.S. are “considerable, continuous and regular,” the corporation is generally considered to be engaged in a U.S. trade or business (USTB).
ECI and how it’s taxed
All income, gain or loss from U.S. sources connected with the USTB is treated as effectively connected income (ECI). It includes income, gains and losses from U.S. sources that are directly related to the corporation’s U.S. business operations.
ECI earned during the year is taxed at the same rates as a U.S. corporation after allowed deductions. The foreign corporation must report all that income on Form 1120-F.
Considerations
- The determination of whether a foreign corporation’s activities is a USTB is not straightforward. It depends on the specific facts of the situation.
- Employees working in the U.S. on behalf of a foreign corporation can create a USTB
- A foreign corporation that operates through a U.S. branch is considered a USTB
- A foreign corporation that’s a partner in a partnership engaged in a USTB is treated as being engaged in that business
- A foreign corporation may determine it is or might be engaged in a USTB but claim it’s exempt from U.S. tax on its ECI under an income tax treaty. In this case, it must file Form 1120-F along with Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b) PDF. For more information on Treaties, see: United States income tax treaties – A to Z and U.S. Tax Treaties, Publication 901
In certain situations, a foreign corporation engaged in a USTB may need to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, together with Form 1120-F. Find details in Form 5472 instructions.
FDAP income includes dividends, rents and royalties. If a foreign corporation doesn’t operate a USTB, but earns U.S.-source FDAP income, that income may be subject to U.S. withholding tax.
What to know
- FDAP income is taxable in the U.S. if the income is U.S.-source.
- FDAP income is usually subject to U.S. withholding tax. Even if no tax was withheld, any person making payment of such income must report it on Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding.
- If a foreign corporation with a USTB receives U.S.-source income not connected with the USTB, the income could be FDAP and subject to withholding.
- If a foreign corporation has U.S.-source FDAP income, it may qualify for a reduced withholding rate or an exemption under an applicable tax treaty. Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities
A foreign corporation must file Form 1120-F if it receives any of these:
- Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding - For earning income from the U.S. that’s not ECI and the amount of U.S. tax withheld as shown on the form is incorrect.
Note: If the foreign corporation isn’t engaged in a USTB during the year and the Form 1042-S shows the correct amount of U.S. tax withheld, it’s not required to file Form 1120-F. - Form 1042-S - With Exemption Code “01” in box 3a.
- Form 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax – For investing in a partnership.
- Form 8288-A, Statement of Withholding on Certain Dispositions by Foreign Persons - For selling an interest in U.S. real estate or interests in a domestic corporation or partnership that primarily owns U.S. real estate.
Find a complete list of who must file in Form 1120-F Instructions.
Source of income
Foreign corporations are generally subject to U.S. tax only on U.S.-source income.
The source of income helps determine whether the foreign corporation is taxed on ECI, FDAP or both.
ECI from a USTB is generally U.S.-source income.
When foreign-source income is ECI
If a foreign corporation has a U.S. office, there are situations when foreign-source income is treated as ECI. This can happen when the U.S. business:
- Plays a material role in selling inventory and title transfers outside the United States.
- Leases or licenses intangible property outside the U.S.
- Negotiates a royalty agreement for the use of a foreign corporation’s intangibles
- Earns dividends and interest from the active conduct of banking, financing or similar business
Due date to file Form 1120-F
The due date depends on whether the foreign corporation maintains an office or place of business in the United States.
- With a U.S. office or place of business - File by the 15th day of the 4th month after the end of the tax year.
- Without a U.S. office or place of business - File by the 15th day of the 6th month after the end of the tax year.
Find details on exceptions in Instructions for Form 1120-F.
How to request an extension
Request an extension before the due date with Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns.
If you don’t file on time
A foreign corporation can claim deductions and credits related to its ECI only if it files a timely and accurate return. Exceptions may apply for certain deductions and credits, including withholding taxes.
Form 1120-F is considered timely for this purpose if it’s filed within 18 months of the return’s due date. A foreign corporation’s first taxable year when filing Form 1120-F falls into the general 18-month rule.
If you don’t file within this timeframe
- Deductions and credits may be disallowed, even if tax is owed.
- Penalties and sanctions may apply for failure to file or late filing.
- Additional restrictions may apply.
Exceptions by statute may apply for certain deductions and credits, including withholding taxes.
Protective returns
In some cases, filing a protective Form 1120-F may help safeguard a foreign corporation’s right to claim deductions and credits on gross income if the IRS later determines the corporation has a USTB.
For example, a foreign corporation that claims tax treaty benefits may preserve its right to claim deductions and credits attributable to its USTB. It can do so if it files a protective return, in case the IRS determines the corporation was not entitled to treaty benefits.
To make the election on Form 1120-F:
- Check the box labeled protective.
- Answer the questions on pages 1-3.
- Provide supporting information.
Protective returns are different from protective claims. A protective claim is usually filed to protect a taxpayer’s right to a refund when the right depends on future events that may not be resolved before the time limit to claim a refund expires.
Related
Effectively connected income (ECI)