Question asked by Sarah
I am a U.S. citizen living in Canada. I do have a U.S. Amazon Store, that uses Amazon FBA services. The corporation is owned equally by me and my Canadian friend. I understand that I need to file 1120-F and 8833. Do I need to file form 5472 and also pay branch profit taxes to IRS?
Disclaimer: This is not tax advice. The answer below is for general purposes. Please exercise caution while making any decision based on this post or any other post on this website. This question may have been rephrased to correct some of the technical terms. The rephrased questions are often more helpful to a wider range of readers. The name of the person asking the question may have been changed at his/her request for privacy reasons.
Direct Taxation of ECI of CFC in the U.S.
IRC §882 (a) imposes a tax on the ECI of a foreign corporation. Effectively connected income (ECI) of a Controlled Foreign Corporation (CFC) is excluded from Subpart F income pursuant to IRC §952 (b).
It appears that the ECI of a CFC causes direct taxation in the U.S. and consequently payment of branch taxes.
No Direct Taxation if no PE in the U.S. due to a treaty
IRC §952 (b) specifically refers to the treaty obligation of the United States.
As per, Canada U.S. Tax Treaty’s article VII the earnings of a Canadian Corporation are only taxable in the United States if there is a Permanent Establishment (PE) in the United States.
Permanent Establishment (PE) is further defined in Article V of the tax treaty. If you determine that the corporation does not have a PE in the U.S., the income is exempt from U.S. taxes. However, in order to claim this exemption a treaty-based position must be filed on a timely basis.
With specific reference to U.S. citizens and resident aliens, there should be a detailed analysis of the facts to ensure that these U.S. persons are not causing PE there, unintentionally. The treaty article of Limitations of Benefits must also be consulted if there are shareholders who are not U.S. or Canadian residents.
A Canadian Corporation must file 1120-F and 8833 with IRS on time. Late filing of 8833 brings a penalty.
IRS form 5472 for Canadian Corporations
If a Canadian Corporation has income effectively connected to U.S. trade or business but timely files 8833, such a corporation is excepted from the requirement of 5472 filings.
IRS form 5472 must be filed by a Canadian corporation if it has a Permanent Establishment in the United States. Failing to file this form, or a substantially incomplete form can attract a penalty of $25,000.
Note: Like every other blog post on this website, please always check the date of publishing of the post. The post may not be updated after it was published. The U.S.-Canada Cross border taxes can get complex with the potential of substantial penalties that can quickly add up to tens of thousands of dollars. Please always ensure to get formal tax advice from a cross-border tax accountant whenever needed.