It has become common for U.S. citizens to engage in business abroad through a foreign corporation. Costa Rica is definitely one of the most favored countries in Central America, partially due to its reputation for stability. It is important to understand, however, that U.S. citizens who engage in business abroad through a foreign corporation must comply with very important tax reporting requirements. In this article, I will try to briefly go over some of the most common US tax reporting requirements that may concern U.S. owners of Costa Rica corporations.
IRS Form 5471 is the most direct reporting requirement that U.S. owners of Costa Rica corporations may face. Form 5471 may undoubtedly be considered as one of the most complex U.S. tax forms, both in its content as well as its scope.
As of the time of this writing, there are four non-exclusive (i.e. a taxpayer can belong to multiple categories at the same time) categories of filers of Costa Rica corporations who must file Form 5471. Determining the categories, if any, to which a taxpayer belongs is a legal decision and a very important one since the number and severity of the reporting requirements directly depends on the number of categories applicable to the taxpayer.
IRS Form 8938 is a newcomer to the world of U.S. tax compliance – in fact, the tax year 2001 is the first year that the form must be filed with the taxpayer’s U.S. tax return.
Form 8938 should be filed only if certain threshold requirements are met. In case the taxpayer already disclosed the information regarding the specified foreign asset on Form 5471, Form 8938 should be filed to cross-reference Form 5471. Explore this article to learn more about Form 8938.
As long as the basic threshold requirement is met, the Report on Foreign Bank and Financial Accounts (“FBAR”) may be required if the taxpayer is the owner of a foreign corporation and has signatory authority (either as an officer of the corporation or an owner) over the corporate accounts.
It is highly important to comply with the FBAR requirement because the FBAR contains perhaps the most severe penalty structure of any other reporting requirement in the entire Internal Revenue Code (IRC).
Subpart “F” Income
If you are an owner of a Controlled Foreign Corporation (“CFC”) and the CFC has subpart “F” income, then you may be required to report subpart “F” income on your personal tax return (e.g. Form 1040). This income is likely to be treated in a highly unfavorable way by the IRC.
Other forms may be required to be filed as a result of the your ownership of Costa Rica corporations. Most of these additional tax reporting requirements are triggered by various transactional activities conducted by the corporation or between you and your corporation. You should consult an international tax attorney for detailed analysis of your specific situation.
Contact Sherayzen Law Office for U.S. Tax Compliance Requirements if You Own Shares of Costa Rica Corporations
If you own a corporation in Costa Rica or you intend to do so, you should contact Sherayzen Law Office. Owner Eugene Sherayzen will analyze your particular situation, determine what U.S. tax reporting requirements apply to you and help you comply with them, and offer a rigorous ethical tax plan designed to make sure that you do not overpay your U.S. taxes under the current IRC provisions.