Planning for Partnerships & LLC’s

US citizens or residents who have an ownership interest in a foreign partnership or foreign disregarded entity usually have additional US tax reporting obligations.  Remember, a dual US citizen, who is a partner in a partnership organized in the country of which he or she is also a citizen, is still considered for US tax purposes to have an interest in a foreign partnership.

As with domestic partnerships and domestic disregarded entities, owners of foreign partnerships and foreign disregarded entities are taxed on their share of the annual operating income of the partnership or disregarded entity.  Domestic partnerships are required to file an annual information tax return reporting the income of the partnership.  Foreign partnerships generally do not have an obligation to file a US tax return.  Instead, a US citizen with ownership interest in the foreign partnership may be required to file a tax return reporting certain information of the foreign partnership.  It is important for US citizens to comply with their US tax reporting obligations relating to their ownership interest in foreign partnerships or foreign disregarded entities, as nonreporting can result in substantial civil penalties or even criminal penalties.

US citizens with ownership interest in a foreign entity can usually elect to have the entity taxed as a corporation, or a partnership or disregarded entity for US tax purposes.  This provides a unique planning opportunity to elect the tax status of the foreign entity that minimizes the US tax on the income of the foreign entity.  If no entity election is made, the US has default rules to classify the foreign entity as either a corporation, partnership, or disregarded entity for US tax purposes.  If the entity election is not effective for the initial year a US citizen is required to report information regarding the foreign entity for US tax purposes, the ability to elect a classification other than the default classification may be limited by adverse tax consequences.

As part of our services, we ensure that US citizens comply with their US tax filing obligations, including those relating to ownership of interests in foreign entities, and provide guidance on the most favorable entity classification election to minimize US taxable income.