In the overview of the series, we advised that in addition to filing income tax returns, U.S. citizens residing outside the U.S. need to file various reports in respect of foreign holdings. Failure to file these reports can result in onerous penalties. In part III of the series, we will discuss the requirements to file the Form 8865: Interest in Foreign Partnerships.
I. Foreign Bank and Financial Account Report, FBAR -Form 114
II. Statement of Foreign Financial Assets, Form 8938
III. Interest in Foreign Canadian Corporation, Form 5471
IV. Interest in Foreign Partnerships, Form 8865
V. Interest in Foreign Trust, Form 3520
VI. Interest in Mutual Funds, Form 8621
The following is a brief overview of when a taxpayer needs to file Form 8865, along with other related information.
Form 8865: Interest in Foreign Partnerships
Unlike corporations, income earned in a foreign partnership flows through to the tax returns of the owners annually. As a result, there is no requirement for the IRS to impose any special rules similar to the Subpart F income rules for Controlled Foreign Corporation (CFC) discussed in Part III. However, the IRS does require the U.S. person to file an information return (Form 8865). This form is similar to the Form 5471 filed in case of foreign corporations.
‘What is ‘Interest in Foreign Partnership’?
Just like a ‘foreign corporation’, a partnership registered in a foreign country is a ‘foreign partnership’ in the U.S.. Similarly, one or many U.S. persons have ‘interest in foreign partnership’ when they hold ownership or significant voting power in the foreign partnership.
Who must file Form 8865?
A U.S. person needs to file Form 8865, if he/she:
- Owns 10% or more of a foreign partnership controlled by U.S. persons;
- Contributes property to a partnership with a value of more than $100,000. The reporting needs to be done in the year of contribution, and in the year of disposal of the property;
- Acquires, disposes, or any others changes that leads to a change in the proportionate share of the partnership interest. This results in ownership of 10% or more of the partnership before or after the transaction.
Similar to Form 5471 reporting, ownership is not limited to direct ownership. An interest owned directly or indirectly by or for a corporation, partnership, estate, or trust is also considered as being owned proportionately by its owners, partners, or beneficiaries. Also, an individual is considered to own an interest if it is owned directly or indirectly by or for his or her family. The family of an individual includes only that individual’s spouse, brothers, sisters, ancestors, and lineal descendants.
Form 8865 is attached to the U.S. person’s annual income tax return.
What does the taxpayer report on Form 8865?
There are four categories of filers in this case, and taxpayers need to provide information depending on the category they fall into.
In general, the information necessary for Form 8865 filing is very similar to a U.S. partnership return (Form 1065).
This form includes the income and expense statement and the yearly balance sheet of the partnership. It reports details of the partnership and the allocable share of the partnership’s income reportable on the U.S. person’s income tax return.
U.S. persons should keep in mind that even if the foreign partnership files a U.S. partnership return (Form 1065), the partner(s) still need to file Form 8865.
What are the penalties applicable in case of Form 8865 non-compliance?
Failure to file Form 8865 or a delayed filing may lead to substantial penalties of $10,000 or more. Additionally, the U.S. person may need to reduce by 10% or more all foreign taxes paid by the partnership while claiming foreign tax credit upon failure to file Form 8865.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. We are a team of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax is dedicated to assist you with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
