Foreign Business Ownership and US Tax

US Tax Focuses on Ownership, Not Geography

One of the most common misconceptions is:

“My business is outside the US, so US tax rules don’t apply.”

From a US perspective, ownership often matters more than location.

When a US person owns an interest in a foreign business:

• that ownership may trigger reporting,
• that ownership may affect how income is treated,
• that ownership may create ongoing tax exposure.

This applies even if:

• the business never trades with the U.S.,
• profits are not distributed,
• income remains offshore,
• the business was formed long before US residency.

The US tax system follows the owner, not the company.

Who Is Considered a “US Person” for Business Ownership

For US tax purposes, a US person generally includes:

• US citizens,
• green card holders,
• foreign nationals who meet the Substantial Presence Test,
• certain trusts and entities.

Once someone is treated as a US person:

• worldwide income and interests come into scope,
• foreign business ownership becomes relevant,
• reporting obligations may arise.

This status can begin:

• upon entry to the U.S.,
• upon meeting residency thresholds,
• upon re-establishing residency after years abroad.

Timing matters.

How the US Classifies Foreign Businesses

The US does not rely solely on local legal labels.

Instead, foreign businesses are often classified based on:

• legal form,
• ownership structure,
• elections made,
• default IRS rules.

Common classifications include:

• foreign corporations,
• foreign partnerships,
• disregarded entities.

This classification determines:

• how income is taxed,
• whether income can be attributed to owners,
• what reporting is required.

Two businesses that look identical locally may be treated very differently under US rules.

Ownership Thresholds That Trigger US Attention

Ownership percentage matters.

Certain US tax rules activate when a US person owns:

• any interest (for reporting),
• 10% or more (for specific regimes),
• more than 50% (for control-based rules).

These thresholds influence:

• whether income is attributed to the owner,
• whether special anti-deferral regimes apply,
• whether additional forms must be filed.

Minority stakes can still create obligations.

Controlled Foreign Corporations (High-Level Concept)

When US persons collectively own more than 50% of a foreign corporation, it may be classified as a Controlled Foreign Corporation (CFC).

At a high level:

• a CFC is subject to special US rules,
• certain income may be taxable to US owners even if not distributed,
• reporting obligations increase significantly.

This is not about penalising ownership.
It is about preventing indefinite deferral of income.

Why “Retained Profits” Can Still Be a US Issue

Many business owners assume:

“If I don’t take money out, there’s no tax.”

Under US rules, this is not always true.

Certain types of income:

• may be attributed to US owners annually,
• even when profits remain inside the business,
• even when no cash is received.

This is one of the most common surprises for inbound residents and returning expats.

Passive vs Active Income in Foreign Businesses

The US distinguishes between:

• active business income, and
• passive income (e.g. interest, dividends, royalties).

This distinction matters because:

• passive income is often targeted by anti-deferral rules,
• different tax treatments may apply,
• classification affects reporting and timing.

A business can generate both types simultaneously.

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Why Reporting Obligations Exist Even Without Tax

Many US reporting regimes exist to provide:

• transparency,
• visibility into foreign ownership,
• anti-avoidance oversight.

As a result:

• reporting may be required even if no tax is due,
• penalties for non-filing can be significant,
• compliance expectations are strict.

This is why awareness matters before income is earned or distributions occur.

Common Situations That Trigger US Scrutiny

Foreign business ownership often enters US focus when:

• someone becomes a US tax resident,
• ownership percentages increase,
• profits accumulate,
• distributions are paid,
• the business is sold or restructured,
• banking relationships request clarification.

By that point, planning flexibility may be limited.

Why Foreign Business Ownership Requires Early Awareness

Foreign business ownership is rarely static.

It evolves with:

• growth,
• reinvestment,
• new shareholders,
• changing residency,
• family involvement.

Understanding how US rules intersect with that evolution helps avoid surprises later.

How Income From Foreign Businesses May Be Taxed

Once a US person owns an interest in a foreign business, the next key question is how income is treated.

From a high level, income may be taxed in one of three ways:

• When it is earned by the business
• When it is attributed to the owner
• When it is distributed

Which treatment applies depends on:

• the classification of the entity,
• ownership percentages,
• the nature of the income,
• elections made (or not made),
• and anti-deferral rules.

This is where many expats and inbound residents first realise that “business income” and “personal income” are not always separate under US tax law.

Pass-Through vs Corporate-Style Treatment

Foreign businesses may be treated as:

Pass-through for US purposes

In some cases:

• income flows directly to owners,
• income is taxable annually,
• cash distributions are not the trigger for tax.

This can apply where:

• the entity is treated as a partnership,
• the entity is disregarded,
• elections change default treatment.

Corporate-style treatment

In other cases:

• income is taxed at the corporate level locally,
• owners are taxed when profits are distributed,
• additional US rules may still apply to retained profits.

Understanding which treatment applies is fundamental.

Anti-Deferral Rules (Conceptual Overview)

The US has long been concerned with deferring tax by retaining income offshore.

As a result, several anti-deferral regimes exist. At a high level, these rules are designed to:

• prevent indefinite accumulation of passive income offshore,
• attribute certain income to US owners annually,
• ensure transparency and consistency.

Key point:

• these regimes are rule-based, not discretionary,
• they apply based on ownership and income type,
• intent is not the determining factor.

Why Passive Income Attracts More Attention

Passive income is often the primary focus of anti-deferral rules.

Examples include:

• interest,
• dividends,
• royalties,
• certain rental income,
• investment-type returns.

When foreign businesses generate passive income:

• that income may be attributed to US owners,
• even if the business itself is active,
• even if profits are retained.

This is where assumptions often break down.

Active Businesses Are Not Automatically Exempt

Owning an operating business does not automatically shield income from US attention.

Factors that matter include:

• how income is characterised,
• where value is created,
• whether activities meet specific exceptions,
• how income is allocated internally.

A foreign operating business may still generate income that is treated differently under US rules.

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Distributions From Foreign Businesses

When profits are distributed:

• cash movements occur,
• local tax treatment applies,
• US reporting is triggered,
• US tax consequences may arise.

Key considerations:

• whether distributions are dividends,
• whether prior income has already been taxed,
• how distributions interact with basis,
• whether foreign tax credits apply.

Distributions are often the point at which complexity becomes visible.

Selling or Restructuring a Foreign Business

Business exits and restructurings introduce additional layers.

Key issues include:

• capital gains vs income treatment,
• allocation between goodwill and assets,
• treaty implications,
• timing relative to US residency,
• reporting obligations on sale.

Selling a foreign business while a US tax resident can produce outcomes that differ significantly from local expectations.

Common Reporting Forms

Foreign business ownership often triggers information reporting, separate from tax.

Examples include:

• forms reporting ownership interests,
• forms reporting income attribution,
• disclosures of transactions and changes in ownership.

These filings exist to provide transparency, not necessarily to collect tax - but penalties for non-filing can be significant.

The precise forms depend on:

• entity type,
• ownership level,
• activity,
• and US person status.

Common Misconceptions About Foreign Business Ownership

Some recurring misunderstandings include:

• “My business doesn’t trade with the US, so it’s irrelevant.”
• “If I don’t take money out, there’s no tax.”
• “Local tax paid means US tax doesn’t apply.”
• “Minority ownership means no reporting.”
• “The IRS won’t notice.”

These assumptions often lead to compliance issues later.

Why Structure and Timing Matter More Than Intent

Foreign business outcomes are shaped by:

• structure chosen years earlier,
• ownership changes over time,
• timing of residency changes,
• timing of distributions and exits.

Intent does not override rules.

Early awareness allows:

• better coordination,
• fewer surprises,
• more realistic expectations.

Hypothetical Cross-Border Business Scenarios

The following scenarios are hypothetical and provided for educational purposes only. They do not represent actual clients or outcomes.

Scenario 1 - US Expat With a Growing Foreign Operating Business

An American citizen lives abroad and owns a majority interest in a foreign operating company. Profits are retained to fund growth.

Key considerations:

• Ownership level may trigger enhanced US reporting.
• Certain categories of income may be attributed annually.
• Retained profits may still have US tax relevance.
• Local tax paid does not automatically eliminate US exposure.

Scenario 2 - Inbound Resident With Pre-Existing Foreign Company

A foreign national moves to the US and becomes a tax resident while continuing to own a company formed years earlier.

Key considerations:

• US tax residency brings worldwide ownership into scope.
• Historical structure and elections matter.
• Income attribution rules may apply even without distributions.
• Reporting obligations may arise immediately upon residency.

Scenario 3 - Minority Stake in a Foreign Company

A US tax resident owns a minority interest in a foreign company alongside non-US partners.

Key considerations:

• Minority ownership does not eliminate reporting.
• Certain thresholds may still trigger disclosures.
• Distributions may create US tax consequences.
• Sale of the interest may produce US capital gains exposure.

Scenario 4 - Sale of a Foreign Business While a US Resident

An individual sells a foreign business after becoming a US tax resident.

Key considerations:

• US tax treatment may differ from local expectations.
• Characterisation of proceeds matters.
• Timing relative to residency is critical.
• Treaty provisions may influence final outcomes.

Practical Checklist for Foreign Business Owners With US Connections

Before assuming that a foreign business sits outside the US system, individuals may wish to review:

• Their US tax residency status.
• Type and classification of the foreign entity.
• Ownership percentage and changes over time.
• Whether income is passive or active in nature.
• Whether profits are retained or distributed.
• Whether reporting obligations apply.
• Timing of residency changes relative to income events.
• Documentation supporting structure and transactions.
• How business ownership fits into broader financial planning.

This checklist supports awareness and preparation, not decision-making.

How Skybound Wealth USA Assists With Foreign Business Ownership Considerations

Skybound Wealth USA assists individuals with:

• understanding how US tax rules intersect with foreign business ownership,
• helping clients identify potential reporting and attribution considerations,
• integrating business ownership into broader retirement and wealth planning,
• coordinating discussions with tax professionals where appropriate,
• supporting globally mobile entrepreneurs as circumstances evolve,
• helping individuals anticipate how business decisions affect long-term plans.

Any recommendations depend entirely on individual circumstances.

Next Steps

If you own a business outside the United States and live - or plan to live - within the US tax system, understanding how ownership, income, and timing interact can help reduce uncertainty and avoid incorrect assumptions.

You may schedule a discussion with Skybound Wealth USA to explore how foreign business considerations fit into your broader financial planning.

Important Disclosures

This material is provided for general informational purposes only and does not constitute personalised financial, tax, legal, or business advice. US tax rules relating to foreign business ownership are complex and may change over time. Application depends on individual circumstances, ownership structure, and compliance history.

Hypothetical examples are for illustration only and do not represent actual client outcomes. Past performance does not predict future results. Skybound Wealth USA is an SEC-registered investment adviser. Registration does not imply any specific level of skill or training. Plea