Form 8858 - Foreign Branch and Foreign Disregarded Entity

WHAT IS THE 8858 FORM?

The 8858 Form is used by US persons who operate a Foreign Branch (FB) or own a Foreign Disregarded Entity (FDE).

FOREIGN BRANCH

For US tax purposes, a Foreign Branch is a division performing in a foreign country, as a business. It maintains a separate set of books. The absence of separate books and records may affect whether a business qualifies as a Foreign Branch. The Foreign Branch is liable to the income tax laws in the foreign country it functions in.

FOREIGN DISREGARDED ENTITY

A Foreign Disregarded Entity (FDE) is an entity that is not created in the US and is disregarded as a separate entity from its owner for income tax purposes.

DISREGARDED ENTITY

This is an IRS term. The IRS, or the courts, disregards the entity and they consider it you as an individual. If you are a sole proprietorship (one owner, not a partnership) you can choose to be a disregarded entity. In this case, 'disregarded' means that your social security number is used, and the entity is disregarded as far as the IRS is concerned.

WHO NEEDS TO FILE A FORM 8858

Tax Owner VS Direct Owner of a Foreign Disregarded Entity:

There are two types of owners for a Foreign Disregarded Entity for tax filing reasons. A tax owner of a Foreign Disregarded Entity is the individual who owns the assets and liabilities under the FDE, whereas the direct owner is the legal owner of the FDE.

In certain cases, for those that it is compulsory to file Form 5471 (filed by any US person who owns more than 10% of a foreign corporation and is part of the 1040 tax return) will also have to file the 8858 Form.

WHEN TO FILE

Form 8858 is due at the same time as your income tax return, April 15, as well as the extensions. The 8858 Form is to be attached to your Federal Tax Return, Form 1040.

INFORMATION REQUIRED TO FILE FORM 8858

When filing your 8858 Form, you will need to include your name, US and foreign address, your Social Security Number (SSN) and Employee ID Number (EIN), and financial activity of the business.

PENALTIES

A $10,000 penalty will be implemented for each annual accounting period for Controlled Foreign Corporations (CFC) or Controlled Foreign Partnerships (CFP) for failure to provide the required information within the given time. If this information is not filed within 90 days after the IRS has informed one with notice, an additional $10,000 the penalty is charged for every 30 days after the 90 day period has passed. The additional penalty is restricted to $50,000, although this is still an exceptionally high fee to pay!
Any individual who fails to file all required information within the given period will face a 10% reduction in foreign tax credits available under sections 901 and 960. Should failure to report or file all required information exceeds 90 days after the IRS has sent one notice of failure, a further 5% the reduction is made for every three months during which the failure has continued since the first 90 day period.
In certain circumstances, criminal penalties are imposed.