Form 1120-F: when a foreign corporation files a US return

A foreign corporation does not file a US return simply because it exists abroad — it files Form 1120-F when it has the right kind of connection to the United States. Working out whether that connection exists, and how the resulting income is taxed, is the heart of the matter, because the US taxes a foreign corporation's US-connected business income quite differently from its passive US-source income. This guide sets out when the return is required and how the tax works.

When the return is required

A foreign corporation generally must file Form 1120-F, the U.S. Income Tax Return of a Foreign Corporation, if any of the following is true for the year:

• It was engaged in a trade or business in the United States, whether or not it had income from that activity and whether or not a treaty protects the income.
• It had income that was effectively connected with a US trade or business.
• It had certain US-source income on which the full US tax was not satisfied by withholding at source.

There is also a protective return: a foreign corporation that believes it is not engaged in a US trade or business, but cannot be certain the IRS will agree, may file a protective Form 1120-F to preserve its ability to claim deductions and credits if the position is later challenged. Without a timely return, those deductions can be lost, so the protective filing is a defensive step rather than an admission of a US business.

How the US income is taxed

The tax splits along the same fault line as it does for individuals. Effectively connected income is taxed on a net basis — after deductions — at the flat 21% corporate rate, in the same way a domestic C corporation is taxed on its profit, as described in Form 1120. Layered on top is the branch profits tax: a further tax, generally at 30% (or a reduced treaty rate), on the corporation's effectively connected earnings treated as repatriated out of the US branch. Its purpose is to approximate the second layer of tax a US subsidiary would bear when it pays a dividend to its foreign parent. Separately, passive US-source income of the FDAP kind is generally taxed at 30% at source through withholding, outside the net-basis return.

Deadline and treaty positions

The due date turns on whether the foreign corporation maintains an office or place of business in the US. One that does generally files by the 15th day of the fourth month after year-end, with an automatic extension available under the extension regulations; one that does not generally files by the 15th day of the sixth month. Because the rule is fact-specific, the exact date should be confirmed from the instructions. Treaty positions are central to Form 1120-F: a treaty may reduce the branch profits rate, or provide that business profits are only taxable in the US to the extent attributable to a permanent establishment, and such positions are disclosed on the return.

Corporation, not individual

It is worth being clear about which return applies. A foreign corporation with US-connected income files Form 1120-F; a foreign individual files Form 1040-NR. And a US LLC that is foreign-owned has its own information-reporting overlay regardless of income — see Form 5472 — which is a separate obligation from the income tax return itself. Because these regimes interact, a foreign business with any US footprint benefits from mapping its structure before assuming which returns it must file.

Sources

This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.

• About Form 1120-F, U.S. Income Tax Return of a Foreign Corporation (IRS)
• Corporations (IRS)
• Businesses (Internal Revenue Service)

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