Discussion:S-Corp Owns 100% of Foreign Corp...

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Discussion Forum Index --> Advanced Tax Questions --> S-Corp Owns 100% of Foreign Corp...


Discussion Forum Index --> Tax Questions --> S-Corp Owns 100% of Foreign Corp...

Tstolley (talk|edits) said:

6 September 2012
I really confused on what to do with this. Foreign disclosure rules are about as clear as mud to me in this situation. I have a new client that is the sole shareholder of an S-Corp. 2011 is first year of activity. This S-Corp is 100% owner of a manufaturing corp in Brazil. 100% of sales and assets are in Brazil. Right now the company is realizing substantial losses and we'd like to claim them as well as future income.

It appears that I need to file form 5471 as well as 926 because of the capital funding that the owner has provided to cover the losses. I'm not sure though. Do I complete form 1120S as normal claiming the income from the corp and file 5471 and 926? Do I complete Form 8858 and Schedule N? Not sure how to proceed.

MP-JD-LLM (talk|edits) said:

7 September 2012
Is the Brazilian entity a Sociedade Anonima? If it is not, then consider an election for it to be treated as a disregarded entity under the check-the-box regs. If it is a Sociedade Anonima, it is a corporation per se as defined in Reg 301.7701-2(b)(8)(i), and you cannot take the losses in the U.S.

Tstolley (talk|edits) said:

11 September 2012
It is a Brazilian Corp... Sociedade Anonima. That's what I was afraid of. Does anyone know any exceptions?

Tstolley (talk|edits) said:

11 September 2012
To be clear, can I elect to have this corp treated as a disregarded entity because there is only one owner? The instructions for 8832 seem to suggest that is a posibility.

Ckenefick (talk|edits) said:

11 September 2012
Not if it's a per se corporation, which it is.

But maybe you can do something prospectively, if that is what is really desired. But you do have to think long-term here.

Smktax (talk|edits) said:

12 September 2012
Convert it to a LTDA and then Check the box.

Tstolley (talk|edits) said:

13 September 2012
After reviewing the organization documents I have discovered that the company is not a corp, but a LTDA. So, yahoo for that. I know I should know this, but what form am I "checking the box" on? This company doesn't have a US EIN, it is owned by the S-Corp, which does.

Ckenefick (talk|edits) said:

13 September 2012
8832, of course.

Tstolley (talk|edits) said:

13 September 2012
So I need to also get the Brazilian entity an EIN?

JAD (talk|edits) said:

13 September 2012
Tim, who handles the tax matters for the Brazilian entity? They might not appreciate you getting an EIN for their client. Are you sure you want to take on this client? This is more than simply complying with the foreign disclosures that a client's pass through entities alert you to - for example, if you prepared the individual's return, received a K-1 from the S-corp, and that K-1 provided the information that you needed to include on the various forms as part of the individual tax return. Are you confident in this area, because there are a lot of traps and very high penalties?

Tstolley (talk|edits) said:

13 September 2012
Further, why do I have to make an election to be a disregarded entity when that is apparently the default classification of the entity? I'm reviewing the SS-4 instructions and it doesn't explain how to do it unless I'm electing to be taxable as a corp... which I don't want to do right?

Tstolley (talk|edits) said:

13 September 2012
JAD - Who handle's the tax matters in Brazil? Not sure of the accountant, never spoke with them. Just the owner, who gets me info when I ask for it. There is no filing requirement in the US other than the client (A US citizen) set up a single member LLC electing to file as an S-Corp here which ownes the brazilian company. Individual who owns it is a long time client that decided to start a business down there.

Ckenefick (talk|edits) said:

13 September 2012
Further, why do I have to make an election to be a disregarded entity when that is apparently the default classification of the entity? I'm reviewing the SS-4 instructions and it doesn't explain how to do it unless I'm electing to be taxable as a corp... which I don't want to do right?

This is why JAD is suggesting getting an expert, which I am not (even close) when it comes to international taxation.

But I know enough to be dangerous. And I know the default for a U.S. 1-member LLC is a disregarded entity. And I do know that it is the opposite in foreign countries. I refer you to the "foreign default rule" in the form instructions (which can also be found in the 7701 regs).

Unless an election is made on Form 8832, a foreign eligible entity is: an association taxable as a corporation if all members have limited liability.

Now, Smtax is an expert and I believe him when, in not so many words, he says the owner(s) of a LTDA has limited liability.

Smktax (talk|edits) said:

13 September 2012
See also Reg. 1.367(b)-3

MP-JD-LLM (talk|edits) said:

14 September 2012
The default pivots around the question of whether any partner is liable for the liabilities of the LTDA. Normally, in a Brazilian LTDA no member has personal liability. Therefore, under Reg. 301.7701-3(b)(2)(i)(B) the LTDA would default to an association and would be treated as a corporation. Making a check-the-box election would be treated as an inbound liquidation. See Smktax note, Reg 1.367(b)-3 would apply. However, it would likely have no effect since the LTDA has no E&P.

There are two enormous advantages to making the election to be treated as a disregarded entity. First, as already mentioned, losses of the LTDA would flow through to the shareholders of the S Corp. Second, an S Corp is not eligible for the indirect foreign tax credit under Sec 902. Sec 1373, treats an S Corp as a partnership for foreign tax credit purposes. Making the check-the-box election would convert the Brazilian taxes imposed on LTDA from Sec 902 credits to Sec 901 credits. Thus, when the LTDA becomes profitable, the shareholders of the S Corp could claim foreign tax credits for Brazilian income taxes.

Ckenefick (talk|edits) said:

14 September 2012
That's why TS needs an expert...but maybe with MP's and and SM's guidance, he can figure things out on this forum.

One question I have here...we have losses in 2011 and we're talking about checking the box now. I presume the inbound liquidation MP is talking about is if the LTDA is a separate entity for 2011. What happens with the 2011 losses? Is there late relief here under 9100 so we can make it as if there is no separate foreign entity for 2011 if this is what is desired?

Foxtron (talk|edits) said:

14 September 2012
Maybe you can qualify for relief with a late election under Rev Proc 2009-41? No need for 9100 there if you have treated the BR co as a flowthrough since inception (i.e., 2011).

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