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A foreign partnership is the relationship between two or more persons, at least one of whom is a U.S. person, joining to carry on a trade or business. Each person contributes money, property, labor or skill with the expectation to share in the profits and losses of the business. Such a joint undertaking is created or organized outside the United States. We have been preparing Foreign Partnership information returns for five years.
A U.S. person can be 1) a citizen or resident of the United States, 2) a domestic partnership, 3) a domestic corporation, 4) an estate or trust that is not foreign. Any such person that invested in a foreign corporation may have to file Form 8865 - RETURN OF U.S. PERSONS WITH RESPECT TO CERTAIN FOREIGN PARTNERSHIPS if one or more categories of filers apply. Form 8865 is a complex information return that requires no signature. It must be prepared and filed by the due date plus extensions of the filer's tax return. Where a tax return is not required, Form 8865 must still be filed:
Category 1 filer:
A U.S. person who controlled the foreign partnership at any time during the partnership's tax year. Control constitutes ownership of more than 50% interest in the partnership. A 50% interest is equal to 50% of the capital, 50% of the profits or 50% of the deductions or losses. Constructive ownership rules also apply.
A U.S. person who at any time during the partnership's tax year owned a 10% or greater interest in the partnership while controlled by U.S. persons each owning at least 10% interests. A 10% interest is equal to 10% of the capital, 10% of the profits or 10% of the deductions or losses.
Category 3 filer:
A U.S. person who contributed property during that person's tax year to a foreign partnership in exchange for an interest in the partnership if that person 1) owned directly or constructively at least a 10% interest in the foreign partnership immediately after the contribution, or 2) the value of the property contributed when added to the value of any previously contributed property during the 12-month period ending on the date of transfer exceeds $100,000.
Category 4 filer:
A U.S. person that acquires, disposes or changes proportional interests in the partnership during that person's tax year. Acquisitions: The person did not own a 10% or greater direct interest in the partnership but as a result of the acquisition owns a 10% or greater direct interest in the partnership. Dispositions: The person owned a 10% or greater direct interest in the partnership before the disposition and after the disposition owns less than a 10% direct interest. Proportional: A U.S. person's direct proportional interest has increased or decreased by at least the equivalent of a 10% interest in the partnership.
Constructive Ownership -
An individual who owns indirectly a partnership interest. Indirect ownership includes immediate family members. Also an interest owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its owners, partners or beneficiaries.
Filing exception -
If the foreign partnership had a Category 1 filer at any time during the tax year, no person will be considered a Category 2 filer.
Failure to timely submit Form 8865 and required schedules is $10,000 per tax year. If the required information is not filed within 90 days after the IRS has mailed notice of failure, an additional $10,000 penalty will apply for each 30-day period. Criminal penalties may also apply for falsifying information or failing to file.