You Own a Business Overseas – A Guide to what you need to know

Foreign Business Taxes in 2026: What Your CPA Needs to Know When You Own a Business Overseas

The short answer on foreign business taxes: If you are a U.S. citizen or green card holder, the IRS taxes your worldwide income, including profits from a business you own in another country. Depending on how that business is set up, you may owe U.S. tax on its profits even if you never take a dollar out, and you will likely file several information returns (such as Form 5471, FinCEN Form 114, and Form 8938) each with its own penalty regime (Form 5471 and Form 8938 carry a $10,000 base penalty, and the non-willful FBAR penalty can run up to an inflation-adjusted statutory maximum per report). If you are not a U.S. citizen or resident, the U.S. generally taxes only your U.S.-source income and income connected to a U.S. business, so a business that stays entirely abroad is usually outside the IRS’s reach. The details, and the dollar amounts, depend on entity type, ownership percentage, where you live, and which tax treaty applies.

Illustrative case study. This is a composite drawn from situations our team sees regularly. Names, figures, and identifying details have been changed to protect client confidentiality.

The email arrived in early spring with a subject line we have learned to take seriously: “I think I missed something.”

The sender, whom we will call Marcus, is a U.S. citizen living in metro Atlanta. In 2023 he formed a private limited company in the United Kingdom to serve software consulting clients in London. By 2025 the company was earning about £180,000 in profit (roughly $240,000 at recent exchange rates). It paid UK corporation tax on time. Marcus reported the salary and dividends he took from the company on his U.S. return. He assumed that was the whole story.

It was not. A colleague had mentioned something called a “Form 5471,” and a quick search sent Marcus to the IRS penalty section. What he read there was accurate: the IRS can assess $10,000 for each year a required Form 5471 is not filed, plus up to $50,000 more per form if the failure continues after an IRS notice. Marcus had two unfiled years (2023 and 2024), and his 2025 return was due within weeks. His UK business bank account had topped £95,000 at points during each year, which meant he also owed FinCEN Form 114 (the FBAR) for those years. The FBAR is not an IRS tax form: it is filed electronically with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) through the BSA E-Filing System.

Here is what our team did, step by step:

1. Mapped the structure. A UK private limited company is classified by default as a foreign corporation for U.S. tax purposes. Because Marcus directly owned 100% of its stock (Section 958(a) ownership) every day of each year, the company was a controlled foreign corporation (CFC), and he was a Category 4 and Category 5 filer of Form 5471.
2. Rebuilt three years of financials in U.S. format. UK statutory accounts follow UK rules and report in pounds. Form 5471 requires a U.S.-style income statement, balance sheet, and earnings and profits schedule, translated into dollars at the correct exchange rates.
3. Tested the income, item by item. The company’s UK corporation tax came to about £43,950 on £180,000 of profit, an effective rate near 24.4% under the UK’s 25% main rate with marginal relief. The high-tax exclusion is not automatic. Income is excluded from tested income only if the taxpayer makes the election under Treas. Reg. § 1.951A-2(c)(7), and only for a tentative gross tested income item whose effective foreign tax rate exceeds 90% of the top corporate rate (18.9% at today’s 21% rate). That rate is measured separately for each tested unit. Marcus’s company had one tested unit, all in the UK, and its rate cleared the 18.9% bar every year.
4. Made the election while the window was open. The election can be made on a timely filed original return or on an amended return filed within 24 months of the original return’s unextended due date. For 2023, that window was weeks from closing. The team filed amended 2023 and 2024 returns making the election and made it on the original 2025 return. With the high-tax income excluded and Marcus’s salary and dividends already reported, there was no unreported income, only missing information returns.
5. Used the IRS’s own catch-up programs. The team filed the late Forms 5471 through the Delinquent International Information Return Submission Procedures with a detailed reasonable cause statement, and filed the late FBARs through the Delinquent FBAR Submission Procedures. Both programs are available only to taxpayers who are not under examination or investigation and have not been contacted by the IRS about the delinquent returns, which is why Marcus’s timing was so important.
6. Built a forward plan. Starting with tax year 2026, new rules apply to CFC owners (more on that below). The team modeled the high-tax election against a Section 962 election, which lets an individual be taxed like a domestic corporation on CFC inclusions, and set a calendar so every form is filed on time going forward.

The result: Marcus came into compliance before the IRS ever came looking, without paying the $20,000 in Form 5471 penalties he had been bracing for, and with a documented plan for every year ahead. His reaction was the one we hear most often: “I wish someone had told me this when I opened the company.”

That is the reason for this article. Foreign business taxes are among the most misunderstood areas of the tax code, and the penalties land on honest people. Below are the questions business owners ask us most when they own, or are thinking about owning, a company outside the United States.

What Are the Pros and Cons of Owning a Business Abroad?

Before getting into foreign business taxes, it helps to weigh the business case. Owning a foreign company can be a smart business move. It can also be the most paperwork-heavy decision a small business owner ever makes. Here is the honest ledger.

The advantages

• Market access and credibility. Many countries require a local entity to sign government contracts, open local bank accounts, hire employees, or hold licenses.
• Liability separation. A local corporation can ring-fence lawsuits, debts, and regulatory risk inside that country.
• Foreign tax credits. Income taxes you pay abroad can usually offset U.S. tax on the same income through the foreign tax credit, which limits true double taxation.
• Treaty benefits. The U.S. has income tax treaties with dozens of countries that can reduce withholding on dividends, interest, and royalties.
• Exclusions if you live abroad. U.S. citizens who live and work overseas and qualify may exclude up to $132,900 of foreign earned income per qualifying person in 2026 (up from $130,000 in 2025), prorated for a partial qualifying year, plus certain housing costs. The exclusion applies only to earned income.

The drawbacks

• Compliance cost. A single foreign corporation can trigger Form 5471, FBAR, Form 8938, and sometimes Form 8858 or Form 1116, every year, each with its own penalty.
• Limited deferral. Many owners expect to pay U.S. tax only when profits come home. For most CFC owners, the anti-deferral rules (Subpart F and the tax formerly known as GILTI) mean U.S. tax can be due on profits that never leave the foreign account.
• Two tax systems, two calendars. Foreign fiscal years, local filing dates, and currency translation all have to reconcile with U.S. rules.
• Penalties that are not tied to tax owed. You can owe zero additional U.S. tax and still face five-figure penalties for a missing information return.
• An open statute of limitations. When a required international information return is not filed, the IRS’s time limit to assess tax on the related return can stay open until the form is filed.

Foreign Business Taxes for U.S. Citizens: How the IRS Taxes Your Company Abroad

The United States is one of only two countries in the world (Eritrea is the other) that taxes its citizens on worldwide income regardless of where they live. Green card holders are treated the same way. For tax purposes both groups are “U.S. persons,” and how foreign business taxes apply to you depends first on what kind of entity your foreign business is.

1. Sole proprietorship or foreign single-member entity treated as a branch

If you operate abroad without forming a corporation, or you own a foreign entity that is treated as “disregarded” (often by filing Form 8832, the check-the-box election), the profits flow straight onto your Form 1040 on Schedule C. You report them in the year earned, whether or not you move the money. A foreign disregarded entity or branch also requires Form 8858.

Self-employment tax still applies, at 15.3% on net earnings up to the Social Security wage base, unless a totalization agreement assigns your coverage to the other country. Agreement countries include the UK, Canada, Germany, Japan, and Australia; check the Social Security Administration’s current list, which changes as new agreements take effect. Important: the foreign earned income exclusion does not reduce self-employment tax.

2. Foreign partnership

A foreign partnership is generally a pass-through. Your share of profit is taxed on your U.S. return each year, and you may need to file Form 8865 if you meet its ownership or control tests.

3. Foreign corporation (the most common structure, and the most complex)

A foreign corporation is a separate taxpayer. In theory, you pay U.S. tax only when it pays you a dividend or salary. In practice, three sets of rules can tax you sooner:

• Controlled foreign corporation (CFC) rules. A foreign corporation is a CFC when U.S. shareholders who each own at least 10% together own more than 50% of the vote or value. If you own your foreign company outright, it is a CFC.
• Subpart F income. Certain passive and related-party income (interest, many royalties, some sales and services income) is taxed to U.S. shareholders currently, as if distributed. For CFC tax years beginning after December 31, 2025, a U.S. shareholder who owns Section 958(a) stock on any day of the CFC’s year takes a pro rata share of the inclusion, and Category 5 Form 5471 filing follows that same Section 958(a) ownership during the CFC year.
• Net CFC tested income (NCTI), formerly GILTI. Most remaining active business profit of a CFC is also taxed to U.S. shareholders each year. For an individual who makes no special election, that income is taxed at ordinary rates up to 37%, without the Section 250 deduction and without credit for the foreign company’s taxes. Two tools change that. A Section 962 election taxes the individual as a domestic corporation would be: the NCTI inclusion plus the Section 78 gross-up of deemed-paid taxes, a 40% Section 250 deduction, and a deemed-paid credit for 90% of tested foreign income taxes. The high-tax exclusion removes an item from tested income entirely, but only if you make the election under Treas. Reg. § 1.951A-2(c)(7) and that item’s effective foreign rate, figured separately for each tested unit, exceeds 18.9%. Both were central to Marcus’s case.

Owners of 10% or more must also file Form 5471. If the foreign company earns mostly investment income, it may instead be a passive foreign investment company (PFIC), which carries its own punitive regime and Form 8621.

4. If you live abroad

Living overseas changes several things. You may qualify for the foreign earned income exclusion on wages you pay yourself (but not on dividends), you get an automatic two-month extension to file (June 15), and the Form 8938 reporting threshold rises sharply. The IRS’s Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, is the primary source.

A Georgia note on foreign business taxes: Georgia taxes its residents’ income using federal adjusted gross income as the starting point, so foreign business income on your federal return generally flows into your Georgia return as well. Under O.C.G.A. § 48-7-20(a.1), Georgia’s flat individual rate is 4.99% for taxable years beginning on or after January 1, 2026, with annual 0.125-point reductions beginning January 1, 2027 until the rate reaches 3.99%, subject to statutory conditions that can delay a reduction. The Georgia Department of Revenue confirms the 4.99% rate for 2026. Pantana CPA serves clients across Georgia and nationwide, and every state treats foreign income a little differently.

Foreign Business Taxes for Non-Citizens: When the IRS Can (and Cannot) Tax You

For non-citizens, the first and most important foreign business taxes question is not “Where is my business?” but “Am I a U.S. tax resident?” The answer comes from two tests explained in IRS Publication 519, U.S. Tax Guide for Aliens.

The green card test

A lawful permanent resident (green card holder) is a U.S. tax resident. Full stop. For foreign business taxes, that is the same as being a citizen. That means worldwide taxation and every rule in the citizen section above, including Form 5471, FBAR, and NCTI.

The substantial presence test

Without a green card, you are still a U.S. tax resident if you were physically present in the U.S. at least 31 days this year and at least 183 days over three years using this IRS weighted formula:

• All days present in the current year, plus
• One-third of the days present in the prior year, plus
• One-sixth of the days present two years ago.

Real-world example: 120 days in 2026, 120 days in 2025, and 120 days in 2024 equals 120 + 40 + 20 = 180 days. Not a resident. Add four more days in 2026 and the total hits 184, which makes you a U.S. tax resident for 2026, and your foreign company may become a CFC that same year. Exceptions exist for certain students, teachers, diplomats, and people with a closer connection to a foreign country, and a treaty tie-breaker claimed on Form 8833 can sometimes override residency.

If you are a nonresident alien

• Your foreign business is generally not taxed by the U.S. as long as it has no U.S. trade or business and no U.S.-source income.
• If it does business in the U.S., income “effectively connected” with that U.S. business is taxed at regular graduated rates (21% for a corporation, filed on Form 1120-F), and a foreign corporation may also owe a 30% branch profits tax unless a treaty reduces it.
• Passive U.S.-source income such as dividends, interest, rents, and royalties is generally subject to a flat 30% withholding tax, or a lower treaty rate.
• If you own a U.S. LLC, a foreign-owned single-member LLC must file a pro forma Form 1120 with Form 5472 every year, even with no income. The penalty for missing it is $25,000.
• Beneficial ownership reporting: FinCEN’s final rule, issued in August 2026, exempts all U.S. companies from Corporate Transparency Act beneficial ownership (BOI) reporting. Only certain foreign companies registered to do business in a U.S. state must report, and they do not report BOI for U.S. person beneficial owners or company applicants. See FinCEN’s BOI page for current requirements.

If you are moving to the U.S. and already own a business back home

This is the single most valuable planning window we see. Before your residency start date, there may be opportunities to restructure, take distributions, or reset the tax basis of company assets while you are still outside the U.S. system. After that date, the same company may be a CFC or PFIC with annual reporting. And if you later give up a green card held in at least 8 of the last 15 years, the expatriation tax rules can treat your worldwide assets, including your business, as sold the day before you leave.

Foreign Business Taxes: U.S. Citizen vs. Non-Citizen Side-by-Side

Question	U.S. citizen or green card holder	Nonresident alien
What income does the U.S. tax?	Worldwide income	U.S.-source and effectively connected income only
Is a foreign company’s profit taxed before distribution?	Often yes, under Subpart F and NCTI if it is a CFC	Generally no
Form 5471 for a 10%+ foreign corporation?	Usually required	Not required
FBAR on foreign accounts over $10,000?	Required	Not required
Owning a U.S. single-member LLC	Reported on your own return (Schedule C or E)	Pro forma Form 1120 plus Form 5472 ($25,000 penalty)
Foreign earned income exclusion	Available if you live abroad and qualify ($132,900 for 2026)	Not applicable
Main return	Form 1040	Form 1040-NR (individuals) or 1120-F (foreign corporations with U.S. income)
Exit tax risk	Yes, for citizens and long-term green card holders who expatriate	No

Foreign Business Taxes: The Forms, Thresholds, and Penalties in One Place

Most foreign business taxes problems we see are not about the tax itself. They are about the information returns below, each with its own threshold and its own penalty.

Form	Who files	Key threshold	Base penalty
Form 5471	U.S. persons with ownership, control, or officer roles in a foreign corporation	Generally 10% ownership; control is more than 50%	$10,000 per form per year, up to $50,000 more after notice, plus a 10% foreign tax credit reduction under Section 6038(c)
FinCEN Form 114 (FBAR)	U.S. persons with interest in or signature authority over foreign accounts	Combined balances over $10,000 at any time in the year	Filed with FinCEN, not the IRS. Non-willful: up to a statutory maximum per report (per year), adjusted annually for inflation under 31 C.F.R. § 1010.821. Willful: up to the greater of an inflation-adjusted maximum or 50% of the balance
Form 8938	U.S. taxpayers with specified foreign financial assets	Single, living in U.S.: over $50,000 at year end or $75,000 at any time. Single, living abroad: $200,000 / $300,000. Joint filers: double these amounts	$10,000 base penalty, plus $10,000 for each 30 days of continued failure after IRS notice (up to $50,000 more, $60,000 total)
Form 5472	25% foreign-owned U.S. corporations and foreign-owned U.S. single-member LLCs	Any reportable transaction with a related party (including capital contributions)	$25,000 per form, plus $25,000 more after 90 days from notice
Form 8865	U.S. persons with interests in foreign partnerships	Control, 10% interests, or certain contributions	$10,000 per form, with continuation penalties
Form 8858	Owners of foreign disregarded entities and foreign branches	Any ownership	$10,000 per form, with continuation penalties
Form 8621	Shareholders of passive foreign investment companies	Most PFIC holdings, with limited exceptions	No fixed dollar penalty, but under the international information return rules the assessment period for PFIC-related items can stay open until the form is filed

On FBAR penalties: In Bittner v. United States (2023), the Supreme Court held that the non-willful FBAR penalty applies once per report (in practice, per year), not once per account. The statutory maximum is adjusted annually for inflation under 31 C.F.R. § 1010.821. In that case, the IRS had assessed $2.72 million across 272 accounts. The Court’s ruling cut it to $50,000, one penalty for each of five years. The National Taxpayer Advocate has written extensively about why these penalties hit ordinary taxpayers so hard.

Key 2027 filing dates for tax year 2026: Form 1040 and most attached international forms are due April 15, 2027 (June 15 if you live abroad, October 15 with an extension). The FBAR is due April 15, 2027, with an automatic extension to October 15, 2027. It is filed electronically with FinCEN, not with your tax return.

What Changed for Foreign Business Taxes in 2026 Under the One Big Beautiful Bill Act?

The One Big Beautiful Bill Act (Public Law 119-21), signed July 4, 2025, rewrote several international tax rules starting with tax years beginning after December 31, 2025. For anyone who owns a CFC, these are the foreign business taxes headlines:

• GILTI is now “net CFC tested income” (NCTI). The name changed and so did the math.
• The inclusion formula is simpler. OBBBA § 70323 restructured Section 951A so that net CFC tested income is simply your pro rata share of tested income over tested loss. The deemed tangible income return subtraction (10% of QBAI) no longer reduces the inclusion, so a CFC with significant equipment or buildings can no longer shelter part of its income that way.
• The Section 250 deduction dropped from 50% to 40%, permanently. A domestic corporation, or an individual making a Section 962 election, includes NCTI plus the Section 78 gross-up of deemed-paid taxes, and Section 250(a)(1)(B) allows a 40% deduction of that amount. Before credits, that works out to an effective U.S. rate of about 12.6% (60% of 21%).
• The deemed-paid credit improved from 80% to 90%. Section 960(d)(1) now deems paid 90% of tested foreign income taxes. Many advisors estimate that foreign profits taxed at roughly 14% or more abroad generate little or no residual U.S. tax for corporate owners, though expense allocation can change the answer.
• Inclusion timing changed. For foreign corporation tax years beginning after December 31, 2025, a U.S. shareholder who owns Section 958(a) stock on any day of the CFC’s year takes a pro rata share of Subpart F and NCTI inclusions, not only the shareholder on the last day.
• Expense allocation is friendlier. Fewer U.S. expenses, such as interest and research costs, are allocated against foreign income, which helps preserve foreign tax credits.
• FDII became FDDEI, with a 33.34% deduction, for U.S. corporations that sell goods and services to foreign customers.
• The 958(b)(4) “downward attribution” fix was restored, which reduces the number of foreign companies accidentally classified as CFCs in mixed U.S. and foreign ownership groups.

What it means for a small business owner: These changes reshape foreign business taxes for anyone with a CFC. If you own a foreign company personally, the 2026 rules make it more important than ever to model the Section 962 election and the high-tax exclusion every year. A choice that saved money in 2024 may not be the right one in 2026.

What Does Your CPA Need to Know? The Checklist

Getting foreign business taxes right starts with complete information. Our team asks every client with foreign business interests for the following. The more of this you bring to the first meeting, the faster and less expensive your engagement will be. You can upload documents securely through our Send a File page.

1. Your citizenship and residency status, including green card dates and a day count of time spent in the U.S. for the last three years.
2. The legal formation documents for each foreign entity: country, entity type, date formed, and registration number.
3. An ownership chart showing every owner and percentage, including spouses, relatives, and other entities.
4. Any U.S. entity classification elections (Form 8832) ever filed.
5. Foreign financial statements and local tax returns for the current and prior year, plus proof of foreign tax paid.
6. Every foreign bank, brokerage, and payment-platform account you own or can sign on, with the highest balance during the year.
7. Distributions, salary, loans, and transfers between you and the company, with dates and amounts.
8. Prior-year U.S. returns, so we can see what was (and was not) filed. If you have never filed Forms 5471 or FBARs, tell us. That is exactly the kind of issue we fix, and the earlier the better.
9. Your plans. Moving abroad, moving to the U.S., selling the company, or adding partners all change the strategy.

Starting a new entity in the U.S. as well? Read our companion guide, You Started an LLC. Did You Tell Your CPA? If you have missed filings and are worried about penalties, our 2026 guide to IRS penalty relief explains the options for domestic penalties, and our post on whether you can legally avoid paying taxes covers the line between planning and trouble. For a full list of what we do, visit our services page.

Frequently Asked Questions About Foreign Business Taxes

Do I have to pay U.S. taxes on a business I own in another country?

If you are a U.S. citizen or green card holder, yes. Foreign business taxes start from one rule: the U.S. taxes your worldwide income. Profits from a foreign sole proprietorship or partnership are taxed as earned. Profits of a foreign corporation you control may be taxed currently under the Subpart F and net CFC tested income (NCTI) rules, even if you leave the money in the company. Foreign tax credits usually reduce or eliminate double taxation.

Does the foreign earned income exclusion cover my foreign business profits?

Only partly. The foreign earned income exclusion (a maximum of $132,900 per qualifying person for 2026 and $130,000 for 2025, prorated for a partial qualifying year) applies only to earned income, such as wages or self-employment earnings, of a qualifying U.S. citizen or resident who lives and works abroad. It does not apply to dividends or to CFC income taxed under Subpart F or NCTI, and it does not reduce U.S. self-employment tax.

What IRS forms do I need if I own a foreign corporation?

Most U.S. owners of 10% or more of a foreign corporation file Form 5471 with their tax return. You will also likely file FinCEN Form 114 (FBAR) electronically with FinCEN, not the IRS, if foreign accounts you own or control exceed $10,000 combined at any time in the year, Form 8938 if your foreign assets exceed its thresholds, and Form 1116 to claim foreign tax credits. The penalty for a missing Form 5471 starts at $10,000 per form per year.

What should I do if I never filed Form 5471 or an FBAR?

Act before the IRS contacts you. The IRS offers the Delinquent International Information Return Submission Procedures and the Delinquent FBAR Submission Procedures for taxpayers who are not under examination. A reasonable cause statement prepared by a CPA can help avoid penalties, especially when all income was already reported. If income was not reported, other programs, such as the Streamlined Filing Compliance Procedures, may apply.

I am not a U.S. citizen. Does the IRS tax my business back home?

Generally no, if you are a nonresident alien. Nonresident aliens are taxed only on U.S.-source income and income effectively connected with a U.S. trade or business. That changes if you hold a green card or meet the substantial presence test (at least 31 days in the current year and 183 weighted days over three years), which makes you a U.S. tax resident taxed on worldwide income.

Is a green card holder taxed on a foreign business the same way as a citizen?

Yes. A green card holder is a U.S. tax resident and follows the same worldwide income, CFC, Form 5471, and FBAR rules as a citizen. A tax treaty tie-breaker can sometimes change this, but claiming it may affect immigration status and requires Form 8833.

What changed for foreign business owners in 2026?

Under the One Big Beautiful Bill Act, for tax years beginning after December 31, 2025, GILTI became net CFC tested income (NCTI), computed as pro rata tested income over tested loss without the 10%-of-QBAI subtraction. For corporations and Section 962 electors, the Section 250 deduction fell from 50% to 40% of NCTI (including the Section 78 gross-up), and the Section 960(d) deemed-paid credit rose from 80% to 90% of tested foreign income taxes. Owners should re-test the Section 962 election and the high-tax election each year.

Does a foreign person who owns a U.S. LLC have to file anything?

Yes. A U.S. single-member LLC owned by a foreign person must file a pro forma Form 1120 with Form 5472 each year it has reportable transactions with its owner, including capital contributions. The penalty for not filing is $25,000.

The Bottom Line

Owning a business abroad is not a tax problem by itself. Not knowing what the IRS expects on foreign business taxes is. In the case at the top of this article, a business owner who paid every dollar of tax he owed was still looking at five-figure penalties because of paperwork no one had told him about. The fix took a careful rebuild of three years of records, a high-tax election made inside a closing window, the right IRS procedure, and a plan for the years ahead.

If you own a company outside the U.S., are about to form one, or are moving to the U.S. with a business back home, talk to a CPA who handles foreign business taxes before the next filing deadline. Pantana CPA has helped individuals and business owners since 2002, from our office in Acworth, Georgia, to clients across the state and the country. Contact our team to schedule a review.

Published by Pantana CPA, Acworth, Georgia | Accounting Services | Bookkeeping | Tax Compliance | Payroll Last – Updated: October 15, 2026 Learn more about our services →

This article is for general information and is not tax or legal advice for your specific situation. Tax rules change frequently. Contact Pantana CPA before making entity or election decisions.