Foreign-Owned US Business Tax

The US filing obligations that attach to a foreign-owned LLC or corporation, including the one that carries a $25,000 penalty and applies even when the entity earned nothing.

The Filing Most Foreign-Owned LLCs Do Not Know About

A single-member LLC owned by a foreign person is disregarded for income tax purposes, which is how the widespread belief arose that there is nothing to file. There is.

Since 2017 a foreign-owned US disregarded entity is treated as a domestic corporation for the limited purpose of the reporting requirements under section 6038A. That means the LLC must file Form 5472 with a pro forma Form 1120 each year, disclosing its foreign owner and its reportable transactions with related parties.

Two points that decide most cases:

• The obligation does not depend on income. A dormant LLC with no revenue still files
• "Reportable transactions" is broader than sales. Contributions of capital from the owner, distributions to the owner, and loans between owner and entity all count, which means a formation year with only a funding transfer is a filing year

The penalty for failure to file, or for filing a substantially incomplete return, is $25,000 per year per reportable entity, with further amounts accruing if the failure continues after IRS notice. It is assessed without regard to whether any tax was owed, and multi-year exposure compounds quickly on entities that have never filed.

When a Foreign Company Files Form 1120-F

A foreign corporation files Form 1120-F if it engages in a US trade or business, or in certain cases where it has US-source income, and it files to claim treaty benefits or a refund of over-withheld tax even where no tax is ultimately due.

The threshold question is whether US activity rises to a trade or business, and if a treaty applies, whether it creates a permanent establishment. Those are two different tests and the answers can diverge. A Mexican company with US customers, a US warehouse, a US sales employee, or a dependent agent concluding contracts sits somewhere on that spectrum, and where it sits changes whether a return is due at all.



Filing deadlines differ based on presence. A foreign corporation maintaining an office or place of business in the United States files on the standard corporate calendar; one without US premises gets an additional two months. Protective returns are worth knowing about: filing when the position is that no US tax is owed preserves the ability to claim deductions and credits if the IRS later disagrees, and skipping the return can forfeit them entirely.

Branch Profits Tax and the Repatriation Layer

A foreign corporation operating a US branch faces a second tax on top of the corporate tax on its earnings. Branch profits tax applies at 30% to the dividend equivalent amount, broadly the branch's effectively connected earnings that are not reinvested in US assets.

The US-Mexico income tax treaty can reduce that rate, as it can reduce withholding on dividends, interest, and royalties flowing back to a Mexican parent. Treaty benefits are not automatic. They depend on the specific article, on the ownership percentage in the case of dividends, and on satisfying the treaty's limitation on benefits provisions. Claiming them requires the correct withholding certificate on file with the US payer, and documentation that survives examination.

This is also where the choice between a branch and a US subsidiary stops being a formality. The two produce different results on branch profits tax, on withholding, on state filings, and on how losses are used, and the better answer depends on the parent's plans for the US earnings.

Which Withholding Form Your US Payer Needs

US payers are required to document the status of everyone they pay, and giving them the wrong form results in withholding at rates far above what you owe.

• Form W-9 is for US persons only, including US citizens, residents, and domestic entities. A foreign owner should never provide one
• Form W-8BEN is for foreign individuals claiming foreign status and, where applicable, treaty benefits on passive income
• Form W-8BEN-E is the entity version, and it is where treaty claims and limitation-on-benefits certification are made for a foreign company
• Form W-8ECI is for income that is effectively connected with a US trade or business, including US rental income under a net election

With no valid form on file, a payer withholds at the statutory rate, 30% on most US-source passive income, and recovering the excess means filing a US return and waiting. Forms also expire, which is a routine cause of withholding restarting on a long-standing relationship that was correctly documented years earlier.

Intercompany Pricing Between a Mexican Parent and Its US Entity

Once a Mexican company and a US entity are under common control, the price charged between them is no longer just an internal decision. Both tax authorities can adjust it.

The United States applies the arm's length standard under section 482, with penalty protection available where contemporaneous documentation supports the pricing. Mexico maintains its own transfer pricing documentation requirements, and the two regimes look at the same transactions from opposite directions: each authority's preferred adjustment increases its own tax base. Management fees, intercompany loans, royalties on brand or software, and cost-sharing for shared staff are the recurring flashpoints.



The practical exposure is double taxation on the same profit, with relief available only through the treaty's competent authority procedure, which is slow. Documenting the pricing before the filings go in is cheaper than defending it in two countries afterward.

Reporting the US Side to the SAT

A Mexican tax resident is taxed by Mexico on worldwide income, which means income and gains from US investments and US entities generally belong on the Mexican annual return as well as being subject to US tax.

Coordinating the two is the same sequencing problem our cross-border clients face in the other direction. Mexican relief for US tax paid depends on the US position being settled, and the two filing calendars do not align. We handle the US side directly and coordinate the Mexican side through our partnership with Maya Contadores SC, a separate and independent Mexican firm, so both returns are built from one set of facts.

Questions Foreign Business Owners Ask Most

Get the Structure Reviewed Before the Next Filing Deadline

Bring your entity documents, your ownership chart, and any notices you have received. We will tell you which returns are actually due, what the exposure looks like on years already missed, and whether the current structure is the one you want going forward, in English or Spanish. If your situation also involves US real estate, start with our page on foreign investment in US real estate and FIRPTA.