Discussion:Foreign Owned US Subsidiary

Situation:

Brazilian company sets up an LLC in Texas (single member) assigns a local individual to be its manager and relinquishes power (voting, management, etc) to him (becomes President, Secretary, Treasurer, etc.). They elect to be taxed as a corporation. The foreign parent company does not control any of its transactions nor does it receive any 'royalties' but does on occasion loan the company money but the loan is paid in full within a matter of a month or two.

Due to technicalities of this foreign company being the parent company and the sole owner/member is Form 5472 required?

FYI: The assigned manager is the President of the parent company in Brazil but is now a US citizen.

I hope this makes sense and any help is appreciated.

It meets the 25% foreign owned test (parent company IS foreign company and not the US citizen correct?) + has a reportable transaction

The LLC in TX is also involved since the manager of that LLC is also the President of the Foreign Corporation. There is transfer pricing to make sure the loans are at arms length. It doesn't matter if the foreign corporation allows it to be managed by a US citizen or not. It still is the parent and the TX LLC is the subsidiary of that. As the TX sub is wholly owned by the Brazilian Corporation and the Brazilian corporation is owned by the US citizen, you have more reporting requirements than only the 5472 in my opinion :)

thank you for your input.

Also Form 5471 if the US person holds stock in the foreign corporation (as President, I am assuming he/she does).

Depending on the structure of the Brazilian company (disregarded, etc.) then other forms may need to be filed.

If the US company is owned by a US citizen, then also if the foreign company is in any way establishing some sort of work in the US, then that foreign corporation may have to file 1120F to report it's activities in the US. Very tricky place...when is the foreign corp actually engaged in the US or not? That is when the nexus standards come into play....

Good luck with this!!! It is time consuming to learn, but well worth it!!!

The US Person is the President but not because he owns stock, they just gave him consent to run the company. However, I will be double-checking. The one and only bank account for the US Subsidiary is located in the States. All transactions (except the loan) sales, expenses are solely credited to the US subsidiary and there is no money due to the Brazilian parent company. I know for sure a TDF will not be required because their accounts are in the States. There are no employees from the Brazilian company working in the states. Its headquarters are located in Brazil but have expanded offices (subsidiaries) throughout the world. Each location accounting for its own sales and such. As for the US person he has taken care of his reporting of foreign income earned. I am more concerned about this foreign owned US subsidiary. As you can see by my name and questions, I am just now starting to learn about international tax and such.

Does any of this information clarify or create more confusion?

I guess what I am trying to see is how they are related? The US citizen OWNS the US company I assume, but he is the President (decision maker) for the Brazilian company? If this is the structure, then that is why all the reporting, to make sure that money is not transferred (per US ideas) to tax havens. In a sub, it is easy to xfer money to/from and keep the money in a lower tax jurisdiction, so IRS keeps the checks/balances to make sure that is not happening.

I am not trying to alarm you or anything, just giving you some areas you may want to research and try to help your client to apply them so that no penalties or problems arise....

What does the subsidiary do for the Brazilian company if no money is due and all the monies are kept in US bank accounts? My question would be...someone is making money or why open a subsidiary in another country and fight with the additional tax requirements?

The US and Brazilian company are related because the Brazilian Company is the sole member/parent of its subsidiary, however, I think when they set it up it was during the President's naturalization process in the US and held off on being the sole member. It's kind of a strange arrangement all-around. The subsidiary does nothing for the Brazilian company, however, it may in the future provide invoicing for its products (but that is much later in the game) and pay a portion to the Brazilian parent company. As of right now, the Brazilian's involvement has been loaning a temporary loan (which was paid back) and forming the the US subsidiary as its sole member.

The citizen is President of both companies (Brazilian and US) but owns no stock.

I wish I had been there from the start to prevent confusion or offered alternate avenues.

As far as other requirements to report, if there are no reportable transactions, then you are in the clear with that :)