Filing US taxes for a dormant UK company
I have a non-US company that is dormant. Do I have to file Form 5471 with the IRS?
The short answer is yes, Form 5471 does need to be filed, which is probably not what you wanted to read, but it’s not all bad news.
Learn about IRS Revenue Procedure 92-70 (Summary Filing Procedure)
Many of the complicated aspects of Form 5471 can be left aside if your limited company meets the IRS criteria for being dormant.
Let’s look at the criteria for the company to be considered dormant and also discuss The Summary Filing Procedure.
For the purposes of this article, we’ll assume the foreign company is 100% owned by one person who is a US citizen or Green Card holder.
Please note that the criteria for a company to be considered dormant are different across many countries. For example, the UK, Australian, and Canadian criteria are different from the US criteria.
Let’s focus on the US criteria, as that’s what matters for the purposes of filing a Summary Filing Procedure.
Simplified criteria to be considered dormant by the IRS:
- No business was conducted (this is a catch-all, so we’ll discuss it further)
- No shares or assets were sold
- No more than US$5,000 of total income
- No more than US$5,000 of total expenses
- The valuation of the assets owned by the company did not exceed US$100,000
- No distributions; and
- No current Accumulated Earnings (de minimis rules)
Your foreign company needs to meet every point listed above.
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My non-US company meets the dormant criteria; what next?
Instead of filing a complete 5471, you may use the Summary Filing Procedure.
How to an IRS Summary Filing Procedure 92-70
To file using the Summary Filing Procedure, the taxpayer must complete and attach only page one of Form 5471 for each dormant foreign corporation with its regularly filed income tax return, usually Form 1040.
The taxpayer must file a copy of each summary return with the IRS in Philadelphia, along with any other 5471 forms they need to file.
At the top of the 5471 printed page, the following text must be written: “Filed Pursuant to Rev. Proc. 92-70 for Dormant Foreign Corporations.”
The following list is a detailed version of the simplified list above;
This IRS revenue procedure applies to persons required under Section 6038(a)(1), 6038(a)(4), or 6046(a)(3) to file Form 5471 with respect to a foreign (non-US) company that is a dormant foreign company. For purposes of this revenue procedure, a foreign company is a dormant foreign company if, at all times during the foreign company’s annual accounting period (within the meaning of Section 6038(e)(2)):
(1) The foreign company conducted no business and owned no stock in any other corporation other than another dormant foreign corporation;
(2) No shares of the foreign company (other than directors’ qualifying shares) were sold, exchanged, redeemed, or otherwise transferred, nor was the foreign company a party to a reorganization;
(3) No assets of the foreign company were sold, exchanged, or otherwise transferred, except for de minimis transfers described in (4) and (5) below;
(4) The foreign company received or accrued no more than US$5,000 of gross income or gross receipts;
(5) The foreign company paid or accrued no more than US$5,000 of expenses;
(6) The value of the foreign company’s assets as determined pursuant to U.S. generally accepted accounting principles (but not reduced by any mortgages or other liabilities) did not exceed US$100,000;
(7) No distributions were made by the foreign company; and
(8) The foreign company either had no current or accumulated earnings and profits or had only de minimis changes in its beginning and ending accumulated earnings and profits balances by reason of income or expenses specified in (4) or (5) above.
What does “No business was conducted” actually mean?
It means what it says, but many consider this a contradiction to other criteria for filing using the Summary Filing Procedure (IRS Revenue Procedure 92-70).
When the IRS refers to “conducting business,” they typically mean the regular, continuous, and substantial activity of selling goods or services in pursuit of a profit
For specifics, we then refer to the US$5,000 limitation on revenue and the US$5,000 limitation on the costs of goods/services sold and business expenses.
The US$5,000 limitation on total income does not mean profit.
If you bought a product for $8,000 and sold it for $10,000, then your total income is $10,000, not $2,000. ($2,000 is the gross profit).
Side Note; What’s the difference between a company and a corporation?
In general language usage, “company” and “corporation” are often used interchangeably. However, in the context of business and law, these terms can have different connotations and formal definitions, and the distinctions can vary based on the country’s legal system.
Here are the general differences from a US perspective:
Company: This is a broad term that refers to any business entity engaged in economic activity, regardless of its size or structure. Companies can include different types of business organizations, such as sole proprietorships, partnerships, limited liability companies (LLCs), and corporations.
Corporation: This is a specific type of company that has a formal structure defined by its state of incorporation. A corporation is a legal entity separate from its owners (known as shareholders) and is governed by a board of directors. In the US, corporations are subject to specific regulations and tax structures, and they have the ability to raise capital through the sale of shares of stock. Two common types of corporations are C corporations and S corporations, which are distinguished by different tax structures.
In other jurisdictions, such as the UK, the term “company” is more formal and is used in a similar way to “corporation” in the U.S. For instance, a “limited company” (Ltd) in the UK is similar to a corporation in the US, in that it is a separate legal entity from its owners, and its owners’ liability is limited to their investment.
The same goes for Australia. A “Pty Ltd” in Australia is similar to a corporation in the US and similar to an “Ltd” or “Limited” company in the UK.
The information provided herein is for general informational purposes only and should not be considered professional advice. While we aim to provide helpful and accurate information, we make no warranties or guarantees about the accuracy, completeness, or adequacy of the information contained here or linked to from this material.
Always get professional advice from a US international tax specialist.
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