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Special Issues When Taking on a Foreign Partner

Business has become increasingly cosmopolitan as the world seems to get smaller and smaller. Even small companies now often transcend national borders and draw both customers and investors from across the globe. Taking on foreign investors can often provide small and medium companies with a whole new world of opportunities and options for growth and development. However, companies considering doing so should be aware that it can create some limitations and new legal obligations.

Taking on a foreign investor ‘ a corporate entity that is organized in a different country or a person who is neither a citizen nor a lawful permanent resident of the United States ‘ can alter a business in several ways:

  • Partnerships with one or more foreign partners must pay federal withholding tax on all income that is allocable to foreign partners, unless the tax due is less than $1,000.
  • Domestic corporations in which foreign persons have at least a 25 percent ownership interest must make additional annual disclosures to the IRS on Form 5472.
  • Foreign partners in U.S. countries must file income tax returns even if they did not actually have any income from U.S. sources.
  • Domestic corporations with one or more foreign shareholders may be precluded from making the S election regarding corporate income tax.

These and other challenges raised by foreign investment are certainly not insurmountable. However, they often can come as a surprise to small businesses that take on foreign investors without fully understanding the implications. Consulting with a Washington, DC tax planning attorney can help you identify, understand and address the unexpected problems that can arise as your business grows and changes.

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