Form 8858 Foreign Disregarded Entity Reporting

Form 8858 reports certain U.S. ownership and operations involving foreign disregarded entities and foreign branches. It can apply where a U.S. person directly owns a foreign disregarded entity or operates a foreign branch and can also arise through Controlled Foreign Corporations and controlled foreign partnerships.

Form 8858 is closely connected to Forms 5471 and 8865 because a foreign corporation or foreign partnership can itself own a foreign disregarded entity or operate a foreign branch.

Colorado Legal assists taxpayers with foreign entity classification, Form 8858 filing, foreign branches, foreign disregarded entities, delinquent Forms 8858, reasonable cause, Streamlined compliance, and related international information returns. Philip M. Falco is both a Colorado attorney and Certified Public Accountant.

What Is Form 8858?

Form 8858 is formally titled Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches.

The form and its schedules satisfy specified U.S. information-reporting requirements involving foreign disregarded entities, commonly called FDEs, and foreign branches, commonly called FBs.

What Is a Foreign Disregarded Entity?

A foreign disregarded entity is an entity that:

• is not created or organized in the United States; and
• is disregarded as an entity separate from its owner for U.S. federal income-tax purposes.

When an entity is disregarded, U.S. tax law generally treats its assets, liabilities, income, deductions, and activities as belonging directly to its tax owner.

Foreign Law Does Not Control U.S. Classification

A foreign entity can be treated differently for U.S. federal tax purposes than it is under local law.

Depending on the entity and applicable classification rules, the U.S. result may be:

• a corporation requiring Form 5471;
• a partnership requiring Form 8865; or
• a disregarded entity requiring Form 8858.

What Is the Tax Owner of an FDE?

The tax owner is the person treated for U.S. income-tax purposes as owning the foreign disregarded entity’s assets and liabilities.

The legal owner and the U.S. tax owner are not necessarily the same person in a tiered international structure.

What Is a Foreign Branch?

For Form 8858 purposes, a foreign branch includes a branch described under the applicable regulations and can also include a foreign qualified business unit, or QBU, under the relevant Section 989 rules.

The existence of separate books and records can be relevant to whether overseas business activity constitutes a reportable foreign branch.

Who Must File Form 8858?

The current Form 8858 instructions divide filers into several categories depending on how the U.S. person is connected to the foreign disregarded entity or foreign branch.

These include direct U.S. tax owners, indirect owners through tiers of disregarded entities, certain Form 5471 filers, certain Form 8865 filers, and specialized partnership-related categories.

Category 1 Form 8858 Filer

Category 1 generally includes a U.S. person that directly is the tax owner of a foreign disregarded entity or directly operates a foreign branch during the U.S. person’s tax year or annual accounting period.

Category 1 generally completes the entire Form 8858 and applicable Schedule M.

Category 2 Form 8858 Filer

Category 2 generally applies where a U.S. person indirectly, through one or more tiers of foreign disregarded entities, is the tax owner of another FDE or operates a foreign branch.

This can require separate Forms 8858 at multiple tiers.

Form 8858 Through a CFC — Form 5471

Form 8858 can also arise when a Controlled Foreign Corporation is the tax owner of an FDE or operates a foreign branch.

Certain U.S. persons filing Form 5471 with respect to the CFC can be required to attach Form 8858.

The exact portions of Form 8858 required depend on the applicable Form 5471 filing category.

Form 8858 Through a Controlled Foreign Partnership — Form 8865

A controlled foreign partnership can likewise own an FDE or operate a foreign branch.

Certain U.S. persons filing Form 8865 with respect to the foreign partnership can therefore have a related Form 8858 obligation.

Additional Form 8858 Filing Categories

The current instructions also contain specialized Categories 5 and 6 involving specified partnership arrangements, including certain Section 987 and dual-consolidated-loss situations.

These categories are technical and generally require analysis of the underlying partnership reporting and the particular method or loss rules involved.

Separate Form 8858 for Each FDE or Foreign Branch

Tiered structures can require multiple Forms 8858.

For example, where one FDE owns another FDE or operates a foreign branch, the IRS instructions can require separate Forms 8858 for the respective entities or branches rather than combining all activity into one Form 8858.

What Information Does Form 8858 Report?

Depending on the filing category, Form 8858 can report:

• identifying information;
• U.S. tax ownership;
• direct and indirect ownership;
• foreign jurisdiction;
• functional currency;
• income statement information;
• balance-sheet information;
• foreign income taxes;
• Section 987 items;
• related-party transactions;
• foreign branch information; and
• other international tax information.

Schedule C — Income Statement

Schedule C generally reports income and expense information of the foreign disregarded entity or foreign branch in its functional currency.

Schedule F — Balance Sheet

Where required, Schedule F reports balance-sheet information for the FDE or foreign branch.

Schedule H — Current Earnings and Profits or Taxable Income

Schedule H provides information used in determining current earnings and profits or taxable income under the applicable Form 8858 rules.

Schedule J — Foreign Income Taxes

Schedule J can report foreign income taxes attributable to the FDE or foreign branch and their treatment under the U.S. foreign tax credit rules.

Schedule M — Related-Party Transactions

Schedule M (Form 8858) reports specified transactions between the foreign disregarded entity or foreign branch and the filer or other related entities.

Depending on the structure, transactions can include:

• sales of inventory;
• purchases;
• rents;
• royalties;
• interest;
• loans;
• capital contributions;
• distributions;
• service payments; and
• other related-party amounts.

Functional Currency

Form 8858 can require financial information in the FDE’s or foreign branch’s functional currency as well as translation into U.S. dollars under specified exchange-rate rules.

This can make accurate foreign accounting records particularly important.

Form 8858 and Foreign Branch Income

Foreign branch operations can affect the U.S. foreign tax credit limitation and the classification of income into the foreign branch category.

Form 8858 therefore can be important not only as an information return but also to the underlying U.S. tax calculation.

Form 8858 and Section 987

A foreign branch or disregarded entity using a functional currency different from its U.S. tax owner can implicate Section 987 foreign-currency rules.

Those rules can affect recognition of foreign-currency gain or loss and can produce additional reporting requirements.

Form 8858 vs. Form 5471

Form 5471 generally reports certain U.S. relationships with foreign corporations.

Form 8858 instead reports FDEs and foreign branches. A CFC can itself own an FDE or operate a foreign branch, resulting in both forms being required as part of the same international filing structure.

Form 8858 vs. Form 8865

Form 8865 generally concerns foreign partnerships.

A controlled foreign partnership can own an FDE or operate a foreign branch. In that situation, Form 8858 information can flow into the related Form 8865 reporting.

Form 8858 and Form 8938

An ownership interest or foreign financial asset associated with an FDE can also be relevant to Form 8938.

The filing requirements should be analyzed independently even where coordination rules avoid duplicate reporting of the same asset information.

Form 8858 and FBAR

Foreign disregarded entities and foreign branches frequently maintain foreign bank accounts.

The taxpayer should separately determine whether those accounts create FBAR filing obligations.

When Is Form 8858 Due?

Form 8858 generally is due with the U.S. person’s income-tax or information return, including applicable extensions.

If the filer is reporting through a CFC or controlled foreign partnership, Form 8858 can be attached to the related Form 5471 or Form 8865 as required by the instructions.

Form 8858 Penalties

Failure to furnish information required under Section 6038 through Form 8858 can result in substantial international information-return penalties.

In applicable Section 6038 cases, an initial $10,000 penalty can apply for a failure to furnish required information for an annual accounting period.

If the failure continues after IRS notice and the applicable 90-day period, continuation penalties can apply at $10,000 for each additional 30-day period or fraction thereof, subject to the applicable statutory limits.

Section 6038 failures can also affect otherwise available foreign tax credits in applicable cases.

Reasonable Cause

Reasonable-cause relief can apply under the relevant international information-reporting rules when the statutory requirements are satisfied.

Relevant facts can include:

• how the foreign entity was classified;
• whether a Form 8832 election existed;
• whether the taxpayer reasonably understood the entity’s U.S. classification;
• professional advice received;
• information supplied to prior preparers;
• foreign books and records;
• tiered ownership;
• prior Form 5471 or Form 8865 filings;
• when the Form 8858 omission was discovered; and
• the taxpayer’s corrective actions.

Delinquent Form 8858

Under the IRS’s current delinquent international information-return procedures, a taxpayer discovering an unfiled Form 8858 generally files it through normal filing procedures.

The delinquent Form 8858 generally should accompany the appropriate amended income-tax or information return or related Form 5471 or Form 8865 filing, depending on the filing structure.

Penalties may still be assessed.

See our Delinquent International Information Returns page.

Reasonable-Cause Statements for Late Form 8858

A taxpayer asserting reasonable cause can attach a reasonable-cause statement to the delinquent filing.

Under current IRS procedures, the IRS may assess an international information-return penalty during processing without first considering the attached statement, requiring the taxpayer to respond to later correspondence.

Form 8858 and Streamlined Filing Compliance

A missing Form 8858 can be one part of broader non-willful international noncompliance.

The Streamlined Filing Compliance Procedures may need to be considered where foreign income, FBARs, Form 8938, Form 5471, Form 8865, and other international filings are also involved.

Frequently Asked Questions

Does every foreign LLC require Form 8858?

No. The entity must first be classified for U.S. federal tax purposes. A foreign entity may be treated as a corporation, partnership, or disregarded entity depending on the applicable classification rules and elections.

What is an FDE?

An FDE is a foreign disregarded entity—an entity not organized in the United States that is disregarded as separate from its owner for U.S. income-tax purposes.

Can Form 8858 be required with Form 5471?

Yes. A CFC reported on Form 5471 can own an FDE or operate a foreign branch that requires Form 8858.

Can Form 8858 be required with Form 8865?

Yes. A controlled foreign partnership can own an FDE or operate a foreign branch, producing related Form 8858 reporting.

Do I need a separate Form 8858 for each foreign disregarded entity?

Potentially yes. Tiered FDEs and separate foreign branches can require separate Forms 8858 under the current instructions.

Can Form 8858 penalties apply even if no additional income tax is due?

Yes. Form 8858 is an international information return, and information-reporting penalties can arise independently of an ordinary income-tax deficiency.

Official IRS Resources

• IRS — About Form 8858
• IRS — Instructions for Form 8858
• IRS — International Information Reporting Penalties
• IRS — Delinquent International Information Return Procedures