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Foreign Subsidiaries and Tax Responsibilities

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In most cases, if you live in the United States but run companies outside of the US, they will be foreign subsidiaries. This means that any foreign company is its own distinct entity. However, it is either controlled or owned by another business entity within the U.S.

Business taxes are complicated in and of themselves. And they can be even more complex when you’re running a company outside of the US. In fact, if your business owns a foreign subsidiary, you should contact an expat tax consultant when tax time rolls around.

Here are a few other things you need to understand about your tax responsibilities.

What Are the Responsibilities of the Parent Company?

The company in the US is known as the parent company. The parent company typically must keep the financials of foreign subsidiaries on its records. It must also comply with other filing requirements and disclosures, depending on the type of company.

For example, if the foreign subsidiary is a partnership, the income from the partnership will flow to the parent company. On the other hand, with foreign corporations, the finances of the foreign subsidiaries and the parent company are separate.

What Tax Forms Should You Use for Foreign Subsidiaries?

The form that you file for your foreign subsidiary will depend on whether it’s a corporation or a partnership. A U.S. entity that owns a foreign partnership must file Form 8865, and US entities that own a subsidiary corporation in another country should file Form 5471

What About Social Security and FICA Taxes for Foreign Subsidiaries?

Another factor to consider when running a business outside of the US is whether you must pay Social Security and FICA taxes for employees of your foreign subsidiaries. The answer to this question is somewhat complicated. Also, it will largely depend on how you’ve structured the partnership.

If your company is a sole proprietorship, the IRS considers your company and your foreign subsidiaries one and the same for tax purposes. In this case, you will probably need to pay FICA taxes. This is the case even though your foreign subsidiaries earned the money in another country.

Take Heed of These Exceptions for Certain Foreign Subsidiaries

However, Social Security and FICA taxes may not apply if your business is based outside of the United States. The exception is if the country in which your business is based has entered into a tax treaty with the US.

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How to Handle Foreign Bank Accounts

If you’re running foreign subsidiaries, then it’s likely that you have foreign bank accounts. This can complicate your business taxes even further. If your company has a financial interest in a foreign bank, such as a bank account or a mutual fund, you’ll need to file a Report of Foreign Bank and Financial Accounts, also known as an FBAR.

Regardless of the name on the account, you’ll need to file an FBAR if the funds in the account belong to the company and the company has signature authority, meaning it can withdraw money from the account for operational expenses.

A Professional Can Help You Understand Your Responsibilities

If you’re running foreign subsidiaries in a country such as Mexico, for instance, help from a professional can make Mexican tax management a lot easier. A professional can help you learn the tax laws in the country in which your business will operate. They will also make it easier to comply with US laws.