International Tax Series: Be Aware of the Form 8865 Filing Requirement if a U.S. Person Owns an Interest in a Foreign Partnership

The Form 8865 may need to be filed if a U.S. person owns an interest in a foreign eligible entity that elects to be classified as a foreign partnership for U.S. federal tax purposes.  A U.S. person who owns more than 50% of a foreign partnership is required to file the Form 8865 as a Category 1 filer.  The Form 8865 generally is required to be filed by a Category 2 filer which is a U.S. person who owned, at any time during the tax year, a 10% or greater interest in the foreign partnership while the partnership was controlled by U.S. persons each owning at least 10% interests.  The Form 8865 is required to be filed by a Category 3 filer which is a U.S. person who contributed property to a foreign partnership in exchange for an interest in the foreign partnership and the U.S. 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 other property contributed by such person or any related person during the 12 month period ending on the date of the transfer exceeds $100,000.

The Form 8865 requires the foreign partnership’s income statement and balance sheet to be reported in U.S. dollars translated from functional foreign currency in accordance with U.S. GAAP.  Certain transactions between the U.S. person filing the Form 8865 or certain related parties and the foreign partnership are required to be reported on Schedule N of the Form 8865.

The U.S. person filing the Form 8865 is required to report transfers of property to the foreign partnership on Schedule O of the Form 8865.  The types of property that must be reported include cash, marketable securities, inventory, tangible property used in a trade or business, intangible property and other property.  The U.S. person is also required to report the partnership’s disposition of such transferred property that occurs while the U.S. person is still a direct or constructive partner.

A $10,000 penalty applies for the failure to timely file the Form 8865 or if Form 8865 is considered to be incomplete or inaccurate when filed.  The Form 8865 is filed with the U.S. partner’s U.S. federal income tax return.  The $10,000 penalty will apply automatically if the U.S. partner’s U.S. federal income tax return is filed late and the return includes the Form 8865.

For further information, please contact your Aronson tax professional or Alison Dougherty, International Tax Services at 301.231.6290.

This information is provided in the format of an informal blog posting and it cannot be relied upon as written tax advice or as a tax opinion to avoid tax penalties.