Plan Sponsors: Know Your International Tax Filing Requirements
Many employers sponsoring employee benefit plans, and specifically multiemployer funds, have continued to expand their investment portfolios. These expansions have included a variety of investments that are outside the normal marketable investments (e.g., limited partnerships and offshore funds). Because these alternative investments may directly or indirectly invest internationally, your plan may be required to complete additional IRS tax filings, even though the plan is a tax-exempt entity. Now’s the time to review your plan (pension, 401(k), health) and determine if you are required to file any international returns.
IRS filing requirements still apply to plans
Since employee benefit plans are tax-exempt entities, a common misconception is that the IRS international tax filing requirements do not apply, or that the certain investments vehicles held by the plan do not meet the definition of a foreign corporation or foreign partnership. Although employee benefit plans are exempt from federal income tax under the Internal Revenue Code, there is no overall exclusion for tax-exempt entities for certain international tax filings. Because domestic trust entities must file these international tax forms, employee benefit plan trusts are included in this requirement.
Defining foreign corporations and foreign partnerships
For purposes of this discussion, we will focus on Cayman Islands exempted companies and Cayman Islands exempted limited partnerships as investments held by employee benefit plans. However, the principles are the same for most other foreign corporations and foreign partnerships from other countries outside the United States.
These entities are set up as investment vehicles, or offshore investment funds, for investors outside the Cayman Islands. The term “exempted” in the name of these entities refers to several things, including:
- The company is not required to keep a register of members open for public inspection.
- The company is not required to hold annual general meetings in the country.
- The company’s or partnership’s operations are held mainly outside the Cayman Islands.
- The company is exempt from Cayman Islands tax for 20 years after formation, or in the case of a partnership, 50 years after formation.
These exempted companies and exempted partnerships are required to file their articles of association or partnership registration with the General Registry of the Cayman Islands. These are the same filing requirements as resident companies who wish to incorporate or register a partnership in the Cayman Islands.
Filing IRS international tax forms
For employee benefit plans, the IRS forms with the most significance for investments in foreign corporations and foreign partnerships are Form 926, Form 8865, and Form 5471. While these forms are informational returns, failure to file them can result in significant penalties.
If filings are required, the filings should be attached to your plan's federal income tax return. If you do not ordinarily file a federal income tax return for your benefit plan, such as for pension plans, the Form 990-T can be filed, and any necessary international tax forms should be attached. For 401(a) plans (e.g., pension plans), the Form 990-T must be filed or extended by the fifteenth day of the fourth month after the plan year-end.
Form 926 reports the transfer of property or cash to a foreign corporation. Entities are required to report the transfer of cash using Form 926 if the transferor directly or indirectly owns at least 10 percent of the stock of the foreign corporation, or if more than $100,000 of cash is transferred during a 12 month period ending on the date of transfer. This filing is required at the U.S. partner level.
An entity is required to file Form 5471 when it acquires at least 10 percent of the stock of a foreign corporation in the aggregate at any time during the year.
An entity is required to file Form 8865 when it owns at least 10 percent of a foreign partnership directly or constructively at any time during the year. The Form 8865 must also be filed if the total value of property or cash contributed to the partnership during the year exceeds $100,000, during a 12 month period ending on the date of transfer.
Analyzing your plan’s investment portfolio
Determining what investments are in your plan's portfolio will help you determine if reporting is required. Investments made directly into foreign corporations and foreign partnerships may require international tax filings. In addition, investment in a partnership that makes transfers to a foreign corporation or foreign partnership could also result in filings, as domestic partners of the partnership must report their share of the transfers to foreign corporations or foreign partnerships.
How we can help
Knowing what investments are in your plan’s portfolio is a proactive measure you can take to help mitigate against tax penalties and fees. CLA's professionals know employee benefit plans and global tax, so we can help you review your plan and make sure it is in compliance with all necessary IRS international tax filing requirements.