Profile of Multinational Businesses with Inbound Investments

By Howard Godfrey, Ph.D., CPA, and Casper Wiggins, DBA, CPA


  • Over 60,000 U.S. corporations are foreign controlled, and receipts of foreign-controlled corporations have been steadily increasing. Typically, foreign corporations purchase existing U.S. corporations rather than starting new corporations.

  • Foreign-controlled domestic corporations file Form 1120 (or one of the other industry- or activity-specific forms in the 1120 series) to report their operations and must also file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, to report a wide range of intercompany transactions.

  • Foreign corporations that operate in the United States through branch operations instead of buying or organizing domestic corporations are subject to U.S. tax on income effectively connected with the conduct of a U.S. trade or business and must report their operations on Form 1120-F if they have effectively connected income.

  • Foreign partnerships doing business in the United States must file a partnership return, and close to 8,000 foreign partnerships filed returns in 2006. Both foreign partnerships and domestic partnerships with foreign partners must withhold tax on income allocated to foreign partners.

Growth in international business brings increased opportunities for CPA firms to provide accounting and tax services. Foreign investors expand business operations into the United States with inbound investments, which include buying or organizing U.S. subsidiary corporations, operating U.S. branches, investing in partnerships that have U.S. business operations, and investing in U.S. real estate. U.S. investors may also choose to expand business operations in foreign countries with outbound investments that follow the same patterns. This article focuses on multinational businesses with inbound investments—i.e., foreign investors with business operations in the United States.

Foreign investment in the United States is significant and is steadily increasing.1 Over 63,000 U.S. corporations are foreign controlled. Foreign investors also have about 15,000 branches in the United States, and about 8,000 foreign partnerships report U.S. source income on annual U.S. partnership tax returns.2 The stock of foreign direct investment in the United States increased $197 billion to $2.6 trillion in 2008.3

On the outbound side, about 11,000 U.S. corporations have about 75,000 foreign subsidiaries with assets of about $9 trillion and net income of about $362 billion.4 Individuals reported foreign tax credits on 7.6 million individual tax returns for 2007, claiming foreign tax credits of about $15 billion for foreign income taxes paid on foreign source income.5 U.S.owned equity in (and loans to) foreign affiliates reached $3.2 trillion at the end of 2008, an increase of 8% over 2007.6

This article presents a profile of the major types of entities engaged in inbound transactions, which involve foreign investment in the United States. Applicable tax laws, tax return filing requirements, and tax planning strategies are explained for each type of multinational business. Clients expanding global business activities will very likely provide new business opportunities for CPAs but may also pose some potential traps and pitfalls to avoid. The United States has tax treaties with over 50 foreign countries with special provisions that may reduce the tax cost of engaging in international business. The global tax perspective and guidelines presented here should be of interest to CPAs with multinational clients.

FCDCs: U.S. Subsidiary with Foreign Owner

In 2007, foreign persons invested $277 billion to acquire interests7 in U.S. businesses or to start new businesses here.8 Most of this investment (92%) was for the acquisition of existing U.S. firms. U.S. corporations that have foreign owners are termed foreign-controlled domestic corporations (FCDCs) and have essentially the same requirements for filing corporate income tax returns and paying taxes as other domestic corporations. Substantially all FCDCs file Form 1120, U.S. Corporation Income Tax Return. A few FCDCs file other forms in the 1120 series, such as 1120L, U.S. Life Insurance Company Income Tax Return, for life insurance companies. FCDCs do not file Forms 1120S, U.S. Income Tax Return for an S Corporation, or 1120-F, U.S. Income Tax Return of a Foreign Corporation, which are discussed later in this article. As noted in the next section, FCDCs must also file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, relating to intercompany transactions.

Number and Importance of FCDCs

For tax years ending between July 2006 and June 2007, U.S. corporations that were foreign controlled filed 63,951 corporate income tax returns.9 These FCDCs had total receipts of $3.8 trillion and assets of $9.7 trillion and paid U.S. income taxes of $50 billion.10 Of these, 9.3% (5,977) were consolidated returns.11 This indicates that the number of U.S. corporations under direct or indirect control of foreign persons was substantially larger than 63,951.

About 27% (17,226) of FCDCs filing returns in 2006 were new (incorporated within the last three tax years). 3,948 were large FCDCs (those with receipts of at least $50 million or assets of at least $250 million), and 391 of these large FCDCs were new.12 (These statistics do not cover corporations that are owned by several foreign persons but where no foreign person owns 50% or more.)13 FCDCs tended to be large, with average assets totaling about $150 million. On average, FCDCs were over 12 times the size of non-foreign-controlled domestic corporations. The 3,948 large FCDCs accounted for about 95% of the assets and 95% of the receipts of all FCDCs. About one-third of the large FCDCs were in wholesale or retail trades and 37% were manufacturers, but the manufacturers tended to be larger, accounting for almost 52% of the business receipts of all large FCDCs. These subsidiaries often purchased substantial amounts of inventory from their parents in foreign countries.14

FCDCs with parents in five countries reported 70% of FCDC receipts. U.K.owned subsidiaries reported 23% of all FCDC receipts, followed by subsidiaries with owners in Japan (16%), Germany (12%), Canada (9%), and the Netherlands (7%). Although Mexico is a major trading partner with the United States, there were fewer U.S. subsidiaries with parents in Mexico.15

Profitability of FCDCs

FCDCs tend to be less profitable than their non-foreign-controlled competitors in the United States. In 2006, 15,293 returns were filed by large non-foreigncontrolled corporations, having average retained earnings of $274 million per return. Returns filed by 3,948 large FCDCs showed average retained earnings of $3 million per return. All manufacturing FCDCs reported gross profit rates16 of 21% of gross receipts, while all non-foreign-controlled manufacturers reported average gross profit rates of 28%, a 7% difference. For companies in wholesale trade, the gross profit rates were 17% for FCDCs and 18% for their non-foreign-controlled counterparts.17

Reasons for this difference in profitability have been the subject of many academic studies, which have yielded conflicting results regarding reasons for such differences. For example, one study found no evidence that taxable income declines more after a non-U.S. shareholder acquires a U.S.-domiciled firm than after a U.S. shareholder acquires a U.S.-domiciled firm.18 Others suggest that the differences may be partly attributable to strategic transfer pricing and tax management.

Form 5472 Reporting Requirements

Role of Intercompany Transactions

The global income tax burden of a parent and a subsidiary corporation can be managed when one entity is in a high-tax (i.e., income tax) country and the other entity is in a low-tax country. For example, a parent corporation (in a low-tax country) may increase the price it charges the subsidiary (in a high-tax country) for inventory. This decreases the amount of income reported in the high-tax country (such as the United States) and increases the amount of income reported in the low-tax country. The global tax liability is reduced as a result of a change in the intercompany pricing policy.

An IRS official has stated that “[t]ransfer pricing that allocates an appropriate return to the U.S. affiliates of multinational groups is a key focus for the IRS.”19 In 2006, the IRS announced a settlement with Glaxo SmithKline Holdings (Americas) Inc. (GSK) over transfer pricing issues for tax years 1989–2005. GSK agreed to pay a record amount of $3.4 billion to the IRS. The government’s position was that GSK understated its U.S. profits. Transfer pricing issues related to trademarks and other intangibles developed by the company’s U.K. parent and the value of GSK’s marketing and other contributions in the United States.

Purpose of Form 5472

Congress was concerned about the potential for using intercompany transactions to shift taxable income to other countries. For this reason, it added Sec. 6038A to the Code, requiring extensive recordkeeping and reporting of information about intercompany transactions with foreign-related parties.

Form 5472 is used for required reporting of intercompany sales and purchases of inventory and other assets, intercompany rent payments, insurance premiums, commissions, loans, interest payments, etc. A reporting corporation that is a domestic corporation and is at any time during the year a 25% foreign-owned entity must file the form. The reporting corporation provides information about intercompany transactions with a 25% foreign owner and other parties that are related under Secs. 267(b), 482, and 707(b)(1).20

Example 1: A foreign partnership, FP, owns 100% of a U.S. corporation (USC) and 25% of a foreign corporation (FC). The remaining 75% of FC is publicly owned by many small shareholders. Sales transactions occur between USC and FC. USC is a reporting corporation. USC and FC are each controlled by FP under Sec. 482 and the related regulations. Therefore, FC is related to USC within the meaning of Sec. 482 and is a related party to USC. Sales transactions between USC and FC are subject to Sec. 6038A.21

Importance of Timely Filing Form 5472

A reporting corporation is required to file Form 5472 with its income tax return for the tax year by the due date (including extensions) of that return. If a reporting corporation fails to file the Form 5472 within the prescribed deadline, the reporting corporation may be assessed a monetary penalty of $10,000 for each tax year for which such failure occurs. After 90 days, the IRS imposes an additional $10,000 penalty for each 30 days in which the company fails to provide the information.22 In summary, the penalty for late filing of Form 5472 is severe and penalty amounts accumulate rapidly. CPAs should make sure that this form is completed and filed on a timely basis. In most cases if the foreign ownership question is answered positively on Form 1120, the IRS will expect Form 5472 to also be filed.

Transactions of Large FCDCs with Related Foreign Persons

In 2006, transactions (other than loans) between large foreign-owned domestic corporations and related foreign parties reached $1.86 trillion.23 Large FCDCs filed 943 corporate income tax returns, with “large corporation” (in this case) being defined as those with total receipts of $500 million or more. These large corporations account for about 80% of all assets and all receipts of the entire population of FCDCs. FCDCs file about 19,191 forms (Form 5472) with their income tax returns. Additional forms from foreign corporations filing Form 1120-F are not included in these statistics.

Sales and purchases of inventory accounted for 80% of the non-loan intercompany transactions. Large FCDCs paid $900 billion to foreign-related parties for inventory and received $595 billion for sales of inventory to those parties. These large corporations owed foreign-related parties a total of $963 billion at the end of 2006 and paid interest of $53 billion to foreign-related parties during the year.24 Information provided on Form 5472 gives the IRS a basis for challenging intercompany pricing for sales of inventory, interest rates charged, royalties paid for use of intellectual property, fees paid for managerial services, etc.

Practice tip: It is critical that FCDCs carefully document all business payments to foreign-related parties to reduce the likelihood that the IRS may treat them as disguised dividends.25

Withholding on Dividends and Interest

Withholding Requirements

U.S. individuals or businesses making payments of U.S.-source income to foreign persons are required to withhold taxes on this income (except where there is an exemption created by statute or treaty) or to appoint a withholding agent to manage the withholding process.26 Financial institutions often serve as withholding agents. Interest and dividends are two important types of such payments. Foreign corporations receive most of the payments of U.S. source income.

The amount of income paid to each recipient is reported on Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding. A payer or designated agent is liable for all withholding taxes owed on such payments. The standard income tax withholding rate is 30%, but the withholding rate on certain types of income may be reduced (possibly to a rate of zero) because of a treaty with the recipient’s country of residence.

Amount of Withholding on U.S.-Source Income Paid to Foreigners

In 2007, 3.6 million Forms 1042-S were filed, reporting a total of $647 billion in payment of U.S.-source income to foreign recipients.27 Taxes of $10 billion were withheld on payments of $70 billion that were subject to withholding. The balance of the $577 billion was not subject to withholding, typically because of provisions of tax treaties with applicable countries.

Foreign Corporation with a U.S. Branch

Branch Return on Form 1120-F

A foreign corporation may choose to operate as a U.S. branch rather than to buy or organize a domestic corporation28 when expanding into the United States. If a foreign corporation operates a business through a branch29 in the United States, the foreign corporation is subject to U.S. tax on income effectively connected with the conduct of a U.S. trade or business in a manner similar to that used to tax domestic corporations. Form 1120-F is a U.S. income tax return filed by foreign corporations that:

  • Engage in a trade or business in the United States;
  • Have income, gains, or losses that are treated as being effectively connected with a U.S. business; or
  • Have U.S. source income, and the liability for U.S. tax on that income has not been satisfied through a withholding tax.
Number and Importance of Branch Returns

In 2006, 14,897 active foreign corporations filed Forms 1120-F. These corporations paid U.S. income tax of $2.5 billion on income effectively connected with the United States and about $141 million on other income such as interest income received from the United States. They also paid branch profits tax of about $83 million.30 A branch profits tax is the counterpart of the withholding tax on dividends paid by U.S. subsidiaries to their foreign parent corporations or other foreign persons.31 The branch profits tax rate is 30% but may be reduced by treaty, possibly to zero.

Foreign corporations had income tax of $1.5 billion withheld on certain income earned in the United States, such as interest and other portfolio income and certain income effectively connected with U.S. business operations. These foreign corporations applied the withheld taxes against their ultimate U.S. income tax liability.

Finance and insurance companies reported total receipts of $110 billion (44% of total) on 4,403 returns, for average total receipts of $25 million per return. However, this segment had only $1.2 billion or 20% of the total net income, due to substantial losses by companies in the credit intermediation segment. Wholesale and retail trade accounted for 40% of the total receipts of foreign branches, with average receipts of about $112 million per return, on 897 tax returns. Companies in real estate rental and leasing filed 4,907 tax returns, but they were smaller, with average receipts of $563,000.32

Importance of Timely Filing Form 1120-F

A foreign corporation that fails to file Form 1120-F on a timely basis loses the right to claim most deductions on the return.33 (See the discussion of Swallows Holding on p. 201.)

Partnership Having U.S. Business Income and a Foreign Partner

Partnership Withholding Requirements

A domestic or foreign partnership is subject to the Sec. 1446 withholding tax requirements when it: (1) has taxable income from a U.S. business operation (effectively connected taxable income, or ECTI) and (2) some of that income is allocated to a foreign partner. If the foreign partner is an individual, the withholding rate is the highest individual income tax rate. The highest corporate income tax rate applies to other types of partners. These withholding requirements do not apply to amounts allocated or paid to U.S. partners.

The partnership or withholding agent withholds income tax from income allocated to a foreign partner based on the type of entity, and possibly based on the Form 8804-C, Certificate of Partner-Level Items to Reduce Section 1446 Withholding, received from the foreign partner. Form 8813, Partnership Withholding Tax Payment Voucher, is used to pay the withholding tax. The withholding tax applies to allocations of U.S. business income to foreign partners whether or not the income is paid to the foreign partners. Form 8804, Annual Return for Partnership Withholding Tax, and Form 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax, are also filed.


When the foreign partner files a U.S. income tax return for the year and reports the effectively connected income, a credit is allowed for the Sec. 1446 tax that has been paid on behalf of that partner. A foreign partner may file Form 8804-C to reduce the amount of required withholding (or possibly eliminate the withholding requirement) when the foreign partner’s U.S. income tax liability will be less than the standard withholding amount. See the exhibit above, which shows the procedure for a domestic or foreign partnership with a U.S. business that has both a U.S. partner and a Canadian partner.

Number and Importance of Partnership Returns

A domestic partnership and a foreign partnership that engages in business in the United States or has income from sources in the United States must file a partnership return. The IRS receives about 3 million partnership returns each year covering about 18.5 million partners. About 8,000 of those are foreign partnership returns covering 296,000 foreign partners. Corporate partners receive the largest amount of income allocations from partnerships, followed by individual partners and partners that are partnerships.34

In 2006, partnerships allocated U.S. business taxable income of $14 billion and losses of $529 million to foreign partners. U.S. income tax of $4 billion was withheld and paid to the IRS on behalf of these foreign partners. In 2006, partnerships filed 276,000 partnership allocation forms (Form 8805) for foreign partners. Similar to a W-2 form, Form 8805 discloses to the foreign partner and the government the amount of ECTI allocated to the partner and the amount of the tax credit allowed for withholding. A total of 228,000 of these forms were filed for foreign partners who are residents of Germany, and these returns reported close to 25% of all Sec. 1446 withholding tax.35

U.S. Partners of Foreign Partnerships

A U.S. person is required to file Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships, when the person owns a controlling interest in the foreign partnership or contributes assets to the partnership. In some circumstances, a 10% or greater interest in a partnership will be considered a controlling interest.36 The form has various schedules, including Schedule K-1, which is used to report the U.S. person’s share of foreign partnership items of income, deductions, credits, etc.

Foreign-Owned U.S. Real Estate

Taxation of Income from Real Estate

A nonresident alien or foreign corporation with rental income from property in the United States is subject to the flat 30% (or lower treaty) withholding tax rate if the rental activity is not effectively connected with the conduct of a trade or business within the United States. A foreign owner of rental real estate located in the United States is generally not considered to be in a U.S. trade or business. Taxing real estate rental income at a flat 30% rate without the allowance of allocable deductions can result in heavy tax burdens on this type of income.

The foreign owner with real estate income files a tax return (Form 1040NR, U.S. Nonresident Alien Income Tax Return, for an individual or 1120-F for a foreign corporation) for income that is connected with the conduct of a trade or business. U.S. income tax on effectively connected income of a foreign corporation is computed using regular corporate income tax rates applied to net income, after deductions for expenses.37

A foreign owner of U.S. real estate may elect to treat real property income as if it were income effectively connected with a U.S. business. Withholding is not required with this election, but the owner is required to file a U.S. income tax return and report the rental income on the return. This enables the owner to claim deductions related to the real property income. However, regulations provide that no deduction is available on a Form 1120-F unless it is timely filed, which can be a trap for the unwary when an owner delays filing an election and a Form 1120-F in the belief that no tax is due because losses are realized.

For example, a Mexican citizen organized Swallows Holding, Ltd., in Barbados. Swallows owned 160 acres of unimproved real estate in California (United States). Swallows had a separate business activity in Barbados but never engaged in a trade or business in the United States. In a three-year period, Swallows reported gross income of $99,000 from rental and options, and expenses of $179,519, resulting in total losses of $80,518.

In the absence of an election to treat income from the real property as being effectively connected with the conduct of a U.S. business, the gross rental revenue would have been subject to a withholding rate of 30%. The company did not make such an election, but on its nontimely filed Forms 1120-F it had information that the IRS accepted as the equivalent of an election. However, the IRS denied all deductions because the corporate returns were filed late and assessed taxes of $14,850. After losing the case in Tax Court, the IRS prevailed at the appellate level.38

Gains and Losses from Disposition of U.S. Real Property Interest

Sec. 897 provides that a gain or loss from a sale or other disposition of a U.S. real property interest is taken into account as if the seller (nonresident alien individual or foreign corporation) were engaged in a trade or business in the United States and as if the gain or loss were effectively connected with that trade or business. The foreign owner must file a U.S. income tax return, reporting the gain on the sale. A credit is allowed for the tax that was withheld on the disposal.

Sec. 1445(a) provides that a buyer (or other transferee) of a U.S. real property interest from a foreign person must deduct and withhold a tax equal to 10% of the amount realized by the foreign person on the disposition. U.S. real property interest includes direct ownership of property and may include an interest in a corporation that owns real estate. Assets held by partnerships, estates, and trusts are treated as being held proportionately by partners or beneficiaries. Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, is used for reporting the selling price and the amount of tax withheld by the buyer of the property or other transferee responsible for withholding under Sec. 1445(a).

Sec. 1445(b) provides several exceptions to this requirement, including an exemption from withholding for persons who purchase property for use as a residence for $300,000 or less. The transferor can apply for and receive a certificate from the IRS authorizing a reduced amount of withholding. This is appropriate where the income tax on the gain will be less than 10% of the selling price.

Amount of Income Paid to Foreign Owners

For 2007, rents and royalties accounted for $27.5 billion, or 4.3% of total U.S. income paid to foreign recipients and reported on Form 1042-S. Corporate recipients earned 88% of rent and royalty income paid to foreign recipients. About 60% went to residents of France, Germany, Japan, and the United Kingdom.39


Growth in global business creates opportunities for accountants to provide additional tax services and places additional responsibility for assuring compliance with many provisions of the tax law that affect businesses with international affiliates or transactions. The guidelines below summarize some of the key points in this article and identify many of the pitfalls to avoid when working with multinational businesses.

  • The IRS reports that 17,226 foreign-owned domestic corporations were started in the United States within a three-year period, which means that there are many opportunities to provide tax advice related to choice of entity and organizational issues.
  • Determine if there are treaties that provide special treatment for international transactions of a U.S. business and its related parties. Determine if intercompany transactions, such as borrowing, can be modified to take advantage of treaty provisions.
  • Recognize that the tendency of FCDCs to be less profitable than their non-foreign-controlled competitors provides an incentive for the IRS to question the profitability of FCDC intercompany transactions.
  • Determine if Form 5472 should be filed, keeping in mind that the minimum penalty for not filing this form is $10,000.40
  • When determining if Form 5472 should be filed, use care in identifying a U.S. corporation’s related parties as defined under Secs. 267(b), 482, and 707(b)(1).
  • Maintain documentation supporting prices for intercompany sales of merchandise and amounts charged for intercompany royalties and management services. Such documentation may be needed to counter an IRS position such as that the terms of intercompany transactions are not arm’s length so income should be reallocated among the related parties, or that a payment to a parent should be treated as a dividend payment.
  • Determine if there are withholding requirements for dividends, interest, rent, and other payments by a U.S. business to a foreign person. Carefully identify those who are foreign persons for whom withholding is required. Determine that all required deposits of withheld taxes are made on a timely basis and all reporting requirements (such as those for Form 1042-S) are met, keeping in mind that the payer is responsible for required withholding taxes that are not withheld. Where applicable, determine that credits for such payments are claimed by those entitled to the credits.
  • For a foreign owner of U.S. real estate, consider recommending an election to have the rental income treated as effectively connected with a U.S. business, thereby qualifying for deduction of related expenses in computing taxable income.
  • Use care with purchases of foreign-owned real estate (or an entity owning such property) to make sure that withholding tax (at the rate of 10%) is withheld and deposited or that a reduced rate of withholding is approved by the IRS.
  • Ensure that foreign-owned businesses use care in identifying income that is effectively connected with a U.S. business, and report that income on the appropriate form (Forms 1120-F or 1040NR).
  • Make timely filing of Form 1120-F a top priority, given that late filing results in the loss of the right to claim deductions.
  • Ensure that adequate training and continuing education are provided for those who are involved in planning and compliance for international transactions. Maintain quality control policies that ensure tax compliance.


Howard Godfrey and Casper Wiggins are professors of accounting in the Belk College of Business at the University of North Carolina–Charlotte. Prof. Godfrey is a member of The Tax Adviser editorial advisory board. For more information about this article, contact Prof. Godfrey at


1 The IRS publishes several reports in its Statistics of Income (SOI) series that contain figures from federal income tax returns filed with the agency. Those publications are the source of most of the statistics presented in this article. The latest SOI studies generally cover tax years 2006, 2005, or 2004. In some cases, an approximate amount or number is given in this article in recognition that the amount or number would likely be greater if statistics were available for later years.

2 IRS, 2006 Statistics of Income: Corporation Income Tax Returns, Table 10, Income Statement and Selected Tax Items, by Selected Sectors, at 107, available at coccr.pdf; Wheeler and Shumofsky, “Partnership Returns, 2007,” Figure H, Numbers of Partnerships, by Type of Entity and Profit Status, Tax Years 1997–2007, at 79, available at

3 Bureau of Economic Analysis News Release, “U.S. Net International Investment Position at Yearend 2008” (June 26, 2009).

4 Mahony and Miller, “Controlled Foreign Corporations, 2004,” SOI Bulletin 49 (Summer 2008). The publication actually reports earnings and profits (not net income) before income taxes of $362.2 billion, but earnings and profits are typically closer to accounting net income than taxable income.

5 This would include flowthrough income and credits from partnerships and S corporations. Bryan, “Individual Income Tax Returns, 2007,” Figure G, SOI Bulletin 13 (Fall 2009), available at

6 Ibarra and Koncz, “Direct Investment Positions for 2008,” 88 Survey of Current Business 20, available at

7 The United States measures foreign direct investment as the amount invested by foreign persons to acquire at least 10% of an existing U.S. business or to start a new business.

8 Bureau of Economic Analysis, News Release, “Foreign Investors’ Spending, 2007” (June 4, 2008).

9 Hobbs, “Foreign-Controlled Domestic Corporations, 2006,” SOI Bulletin 102 (Summer 2009), available at FCDCs were owned 50% or more by a foreign person at some time during the year. A person is an entity, including an individual, corporation, partnership, estate, or trust. A domestic corporation is organized in the United States.

10 Corporations with foreign ownership between 25% and 50% filed 4,097 returns, with U.S. income tax after credits of about $2.6 billion (small in comparison with the tax of $50 billion paid by FCDCs). Id. at 102, n. 5.

11 Id. at 102, 103.

12 Id. at 110, 113. Unless otherwise indicated, this is the definition of a large corporation used in this article.

13 Corporations in the United States that are not FCDCs are referred to in this article as non-foreign-controlled corporations. They may include corporations controlled by U.S. persons or by several foreign persons, with no single foreign person owning 50%.

14 Hobbs, “Foreign-Controlled Domestic Corporations, 2006,” pp. 113, 114, 115, 129, 136, 138. In one study of very large FCDCs (those with gross receipts over $500 million that filed a Form 5472), those FCDCs had total receipts of $3.1 trillion and paid $900 billion to foreign-related parties for the purchase of inventory, indicating that foreign corporations use U.S. subsidiaries as a vehicle for substantial sales of their products. See Lowe, “Transactions Between Large Foreign-Owned Domestic Corporations and Related Foreign Persons, 2006,” SOI Bulletin 208, 212 (Fall 2009).

15 Hobbs, “Foreign-Controlled Domestic Corporations, 2006,” p. 134.

16 Gross profit is business receipts less cost of sales.

17 Hobbs, “Foreign-Controlled Domestic Corporations, 2006,” p. 111.

18 See Blouin, Collins, and Shackelford, Does Acquisition by Non-U.S. Share holders Cause U.S. Firms to Pay Less Tax? Prepared for the International Seminar in Public Economics Conference on Income Taxation and Financial Innovation, Berkeley, December 7–8, 2001.

19 IRS News Release IR-2006-142 (September 11, 2006).

20 Line 7 on Form 1120, Schedule K, asks if any foreign person owns at least 25% of the stock and provides a space to list the number of Forms 5472 being filed. A foreign corporation operating in the United States is also a reporting corporation.

21 Regs. Sec. 1.6038A-1(m), Example (5).

22 Sec. 6038A(d). The penalty also applies in case of failure to maintain records required by regulations. Criminal penalties may also apply. Sec. 6038A(d) also contains a reasonable cause provision.

23 These statistics are taken from Lowe, “Transactions Between Large Foreign-Owned Domestic Corporations and Related Foreign Persons, 2006,” SOI Bulletin 201 (Fall 2009), In this study, a foreign-owned domestic corporation is 25% or more owned at some time during the year by a single foreign shareholder, generally a foreign parent corporation. In other SOI studies (and in the discussion earlier in this article), the ownership threshold is 50%.

24 Id. at 201–2.

25 See, e.g., Union Ganadera Regional de Chihuahua, T.C. Memo. 2000-357, where the IRS sought to treat payments from a U.S. subsidiary to its foreign parent as disguised dividends, but the court found that they were legitimate business expenses.

26 Secs. 1441 and 1442.

27 IRS, Foreign Recipients of U.S. Income, Table 1: Forms 1042S: Number, Total U.S.-Source Income, and U.S. Tax Withheld, Tax Treaty Countries and Total Non–Tax Treaty Countries, 2007, available at

28 A domestic corporation is organized in the United States.

29 A branch is not incorporated in the United States, although the company may be incorporated in a foreign country.

30 IRS, 2006 Corporation Returns—Returns of Active Corporations, Form 1120-F, Table 10: Income Statement and Selected Tax Items, by Selected Sectors, available at These statistics include foreign insurance companies, even though they file Forms 1120-L and 1120-PC rather than Form 1120-F.

31 Congress enacted the branch profits tax to create parity between foreign corporations that choose to operate in branch form and those that choose to operate through a domestic subsidiary in the United States (Sec. 884(a)). Form 1120-F is used to report and pay income tax on taxable income from a U.S. business operation, the branch profits tax, and other taxes as well.

32 IRS, 2006 Corporation Returns—Returns of Active Corporations, Form 1120-F, Table 10.

33 Regs. Sec. 1.882-4(a)(3)(ii).

34 Wheeler and Shumofsky, “Partnership Returns, 2007,” Figure H, p. 79, Figure J, p. 80, and Table 1, p. 86.

35 IRS, Foreign Recipients of U.S. Partnership Income, 2006, Table 1: U.S. Income and Tax Withheld as Reported on Form 8805, by Country of Residence, available at

36 Regs. Secs. 1.6038-3 and 1.6038B-2(a)(1).

37 Sec. 882(a)(1).

38 Swallows Holding, Ltd., 515 F.3d 162 (3d Cir. 2008), vacating and remanding 126 T.C. 96 (2006).

39 IRS, Foreign Recipients of U.S. Income, 2007, Table 2: Forms 1042-S: Number, U.S. Tax Withheld, and U.S.-Source Income, by Principal Type of Income, Selected Recipient Type, and Selected Country of Recipient, 2007, available at This IRS report does not provide separate amounts for rental income and royalty income, but presum-ably the bulk of this amount is rental income.

40 CAMICO reports that its professional liability insurance policyholders frequently file claims with the insurance company after incurring liability to their clients because of failure to prepare Forms 5472 (for domestic corporations that are foreign controlled) and 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations (for domestic corporations that have a foreign subsidiary). See Lee, “Frequent Tax Claims Against CPAs,” AZ CPA (February 2007), available at

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This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.