Key international tax issues for individuals and businesses

Editors: Brian Hagene, CPA, CGMA (CPAmerica), and Susan M. Grais, CPA, J.D., LL.M. (Ernst & Young LLP)

The increasing globalization of our world means that more and more individuals find themselves with international financial ties. Whether they are a U.S. citizen living and working abroad, a foreign national establishing residency in the United States, or an entrepreneur with business interests spanning borders, understanding the complexities of U.S. filing obligations is paramount. Failure to navigate these intricacies can lead to significant penalties and unexpected tax liabilities. The following are some of the most commonly encountered international tax issues:

US citizens and resident aliens abroad

U.S. citizens and resident aliens are taxed on their worldwide income, regardless of where they live or where the income is earned. This fundamental principle often comes as a surprise and can lead to double taxation if not properly managed.

Key issues for U.S. citizens and resident aliens abroad include:

• Foreign earned income exclusion: This allows qualifying individuals to exclude a certain amount of foreign earned income from U.S. taxation. However, it is not automatic and requires filing Form 2555, Foreign Earned Income, and meeting the tax-home test and either the physical-presence test or bona-fide-residence test (Secs. 911(a)(1) and (d)(1)).
• Foreign tax credit (FTC): The FTC allows individuals to offset U.S. tax liability with taxes paid to a foreign country, helping to prevent double taxation (Sec. 901). Strategic use of the foreign earned income exclusion and FTC is crucial for minimizing overall tax burdens.
• Foreign bank and financial accounts: U.S. persons with an aggregate balance of over $10,000 in foreign financial accounts at any point during the calendar year must file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR). Penalties for nonfiling can be substantial.
• Foreign Account Tax Compliance Act (FATCA): In addition to filing the FBAR, provisions under FATCA require reporting of specified foreign financial assets by specified individuals and specified domestic entities on Form 8938, Statement of Specified Foreign Financial Assets, if their value exceeds certain thresholds. This often overlaps with the FBAR but has distinct reporting requirements and penalties.
• Foreign business interests: U.S. persons must file information returns with complex reporting obligations if they have certain ownership interests in foreign corporations (Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations); foreign partnerships (Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships); or foreign disregarded entities or foreign branches of a U.S. business (Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)). These filing obligations can trigger significant penalties if the forms are not filed accurately and on time.
• Passive foreign investment companies (PFICs): Foreign corporations are PFICs if they have gross income that is 75% or more passive or hold an average percentage of assets of which at least 50% produce or are held for the production of passive income. Ownership in companies (e.g., foreign mutual funds or hedge funds) that qualify as PFICs can lead to complex and often punitive tax treatment if owners do not file Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. Proper planning is essential to avoid unexpected tax implications.
• Transfer of property to a foreign corporation: U.S. citizens or residents must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report any exchanges or transfers of tangible or intangible property described in Sec. 6038B(a)(1)(A) to a foreign corporation. A U.S. person that transfers cash to a foreign corporation (in a transfer that is described in Sec. 6038B(a)(1)(A)) must also report the transfer on Form 926 if, immediately after the transfer, the person holds, directly or indirectly, at least 10% of the total voting power or the total value of the foreign corporation, or the amount of cash transferred by the person to the foreign corporation during the 12-month period ending on the date of the transfer is more than $100,000.
• Social Security and Medicare taxes (self-employment tax): U.S. citizens living abroad who are self-employed may still be subject to U.S. self-employment taxes, even if they are also paying social security equivalents in their country of residence.
• Gifts and bequests from foreign individuals or entities: U.S. citizens or resident aliens who receive gifts or bequests from a nonresident alien individual or a foreign estate are required to disclose the details about them on Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, to the IRS if the amount of the gifts or bequests exceeds $100,000.
• Sailing permit: Alien individuals (other than those exempted from the requirement) departing the United States must obtain a “sailing permit” from the IRS certifying they have complied with all applicable tax obligations by filing Form 1040-C, U.S. Departing Alien Income Tax Return, or Form 2063, U.S. Departing Alien Income Tax Statement, particularly if they are leaving permanently.
• Exit tax: Exit tax, also called expatriation tax, is owed by certain U.S. citizens who renounce their citizenship and long-term residents who terminate their long-term resident status (expatriates). Expatriates must file Form 8854, Initial and Annual Expatriation Statement, to certify compliance with tax obligations in the five years before expatriation and to comply with their initial and annual information reporting obligations under Sec. 6039G.

Non-US citizens living in the United States

Non–U.S. citizens who come to live in the United States must determine their U.S. tax residency status — resident alien or nonresident alien. An individual generally is a resident alien for tax purposes if they meet either the green–card test or the substantial–presence test for the tax year. Key considerations for non–U.S. citizens in the United States include:

• Resident aliens: They are generally taxed on worldwide income, similar to U.S. citizens, and, like citizens, file Form 1040, U.S. Individual Income Tax Return. They must also report foreign financial assets (FBAR and/or FATCA), if applicable.
• Nonresident aliens: They are taxed only on U.S.-source income, which is categorized as either effectively connected income (taxed at graduated rates) or fixed, determinable, annual, or periodical income (generally taxed at a flat 30% or lower treaty rate). Special rules apply to certain types of income. They typically file Form 1040-NR, U.S. Nonresident Alien Income Tax Return.
• Tax treaties: The United States has income tax treaties with many countries, which can reduce or eliminate U.S. tax on certain types of income for non-U.S. residents. Understanding and properly claiming treaty benefits is crucial.
• Remittance tax: Beginning with transfers made on and after Jan. 1, 2026, a 1% excise tax will be imposed on the amount of remittance transfers made to a designated recipient located in a foreign country. It applies only to remittance transfers to the remittance transfer provider for which the sender provides cash, a money order, a cashier’s check, or similar physical instrument (Sec. 4475, added by H.R. 1, P.L. 119-21, known as the One Big Beautiful Bill Act (OBBBA)).

Foreign business income and investments

For individuals with ownership stakes in foreign businesses, the complexity escalates. These situations often require not just individual tax compliance but also reporting related to the foreign entity itself:

• Classification of foreign entities: How a foreign entity is classified for U.S. tax purposes (e.g., corporation, partnership, or disregarded entity) has significant implications for reporting and taxation. Filing a Form 8832, Entity Classification Election, may be advisable.
• Controlled foreign corporations (CFCs) and tested income: U.S. shareholders (a U.S. person who owns 10% or more of the total combined value of all classes of stock or the total combined voting power of all classes of stock entitled to vote of a foreign corporation) of CFCs, as defined in Sec. 957, are subject to complex rules, including the net CFC tested income regime (formerly the global low-taxed income regime, before being renamed by the OBBBA), which taxes certain foreign earnings currently.
• Corporation tax return for foreign entities conducting business in the United States: Foreign corporations in a variety of circumstances may need to file a corporation tax return in the United States on Form 1120-F, U.S. Income Tax Return of a Foreign Corporation. Nonfiling may lead to heavy penalties.
• Earnings and profits (E&P) and FTC carryovers: Tracking the E&P of foreign corporations and managing FTC carryovers are crucial for efficient tax planning.

The importance of proactive planning and expert guidance

The international tax landscape is constantly evolving, with new regulations and reporting requirements emerging regularly. The potential for inadvertent noncompliance and severe penalties underscores the importance of proactive planning and expert tax guidance. By working with experienced international tax professionals, individuals can ensure they meet their U.S. tax obligations, minimize their worldwide tax burden, and confidently manage their global financial affairs.

Editors

Brian Hagene, CPA, CGMA, is partner/owner at Mathieson, Moyski, Austin & Co. LLP in Lisle, Ill., with CPAmerica. Susan M. Grais, CPA, J.D., LL.M., is a managing director at Ernst & Young LLP in Washington, D.C.

For additional information about these items, contact thetaxadviser@aicpa.org.

Contributors are members of or associated with CPAmerica or Ernst & Young LLP, as designated.