Foreign business is a Corporation or it is not?

Taxpayer has a business in overseas.

The question of whether it is a corporation or not came up for the obvious reason due to the special filing requirements and required disclosures of US taxpayers owning a corporation in overseas.

Taxpayer said he had consulted with an authoritative source in that foreign country and was told that his business is not a corporation. They said his business is a sole proprietorship.

Two issues that make me concerned though.

(1) The business has limited liability. Based on situation in the US, limited liability points to the business being a corporation.

(2) Taxpayer said he is also an employee of the business. And the business pays him wages. In the US, a sole proprietorship obviously cannot do that. And if a business in the US can puts its owner on payroll as an employee, it is a corporation.

The 'authoritative source" explained to him the rules in every country are different. What are true in the US do not mean they are also true in another country. In short, they are saying that his business is still a sole proprietorship even if it has limited liability and it can also puts its owner on payroll.

May the experts in US expats tax please chime in your thought and opinion? Thank you.

Foreign Corporation:
Foreign: Organized outside the US
Corporation:
Per se corporations under Regs. §301.7701-2(b)(8)
Eligible entities classified as corporations under Regs. §301.7701-3(b)(2) that have made no election
Eligible entities that elect to be taxed as corporations

An eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner.

"(b) Classification of eligible entities that do not file an election -
(1) Domestic eligible entities. Except as provided in paragraph (b)(3) of this section, unless the entity elects otherwise, a domestic eligible entity is -
(i) A partnership if it has two or more members; or
(ii) Disregarded as an entity separate from its owner if it has a single owner.
(2) Foreign eligible entities -
(i) In general. Except as provided in paragraph (b)(3) of this section, unless the entity elects otherwise, a foreign eligible entity is -
(A) A partnership if it has two or more members and at least one member does not have limited liability;
(B) An association if all members have limited liability; or
(C) Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability."

Since his business has limited liability, it is considered a corporation by default. Have I understood it correctly?

He can make an elect not to be treated as corporation. Form 8832.

He can make an elect not to be treated as corporation. Form 8832.

Thank you. Big help.

A related question.

Lets say he files Form 8832 and elects not to be treated as corporation, how should the wages from the business be taken care of? The business will deduct his wages as expenses. But then he also wants to file for the Foreign Earned Income Exclusion. If that is allowable, the wages are deductible to his business but it is not taxable to him (excluded through FEIE). Would it be too good to be true?

A qualifying individual may claim the foreign earned income exclusion on foreign earned self-employment income, which is the disregarding entity net profit if not paying himself salary.

However, the excluded amount will reduce regular income tax but will not reduce self-employment tax. Your client did reduce self-employment tax by making the election and paid himself salary.

US Self-Employment tax might be eliminated if the US and the other country have a Totalization agreement in place.

Looks like too late to file Form 8832 and make the election for 2019 tax return anyway.

“ There's no “deadline” to file Form 8832—it can be filed either right when you start your business, or at any point during your business's lifetime. However, the filing date is important. The tax status for the business is effective either: Up to 75 days before filing the form.”

So even if they file Form 8832 and the election is made today, the business is still considered a corporation for most of 2019.

Is your client's entity a French "EURL" by any chance? (it fits the initial description).
If it is there is some write-up on EURLs - and I could try to dig through my files to find it...

5.3.1 here: https://www.french-property.com/guides/ ... cture/sarl

Thank you for pointing that out, But no such luck. His business is in Taiwan.

Failure to timely file may be remediated:

Automatically under certain circumstances within 3 years and 75 days of the requested
effective date of the eligible entity's classification election.

Rev. Proc. 2009-41

Filing an entity classification election to convert an entity from a corporation to a disregarded entity is treated as a deemed liquidation of the corporation. Treas. Reg. §301.7701-3(g)(1)(iii). The deemed liquidation of the foreign corporation may trigger gain at the corporate level as well as at the shareholder level. You should consider the value of the business relative to tax basis before making such an election.