FATCA & PFIC: what every US person founding a non-US company must surface

The CFC threshold: where routine incorporation becomes reportable

A Controlled Foreign Corporation, in IRS terminology, is any non-US entity where US persons own more than 50 per cent of vote or value. Own 100 per cent of a Cyprus Ltd or a Singapore Pte? You have a CFC. Own 60 per cent with a non-US co-founder holding 40? Still a CFC. The threshold is not 'majority' — it is aggregate US ownership above half.

Once you cross that line, Form 5471 becomes mandatory. Categories vary (A through E), but the most common is Category 5: US persons owning at least 10 per cent of a CFC. The form demands reconstructed balance sheets, profit-and-loss statements in USD, and a reconciliation between foreign GAAP and US tax principles. Most founders learn this exists when their accountant refuses to sign off the 1040 without it.

Penalties start at $10,000 per form per year if you miss the deadline. Add $10,000 for every 30 days of continued non-compliance, capped at $60,000 per form. Criminal liability kicks in if the IRS deems the omission wilful. A Delaware SaaS founder we worked with in 2023 — $1.8m ARR, UK subsidiary incorporated two years prior — faced a $40,000 penalty plus interest because his previous CPA had never mentioned Form 5471. He paid. The clock runs from the due date of your tax return, including extensions.

GILTI and Subpart F: the income you cannot defer

Let me put it bluntly: file Form 5471 on time and you are still not done. The next trap is that your foreign entity's income may be taxed in the US immediately, even if you never repatriate a dollar. Two regimes govern this: Subpart F (vintage 1962) and GILTI (introduced 2018, effective for tax years after 31 December 2017).

Subpart F targets passive income and certain related-party transactions. Dividends, interest, rents, royalties received by your CFC — all Subpart F income, attributed to you personally in the year earned. GILTI — Global Intangible Low-Taxed Income — sweeps up everything else: active business profits taxed at an effective foreign rate below 13.125 per cent (after the section 250 deduction). If your UK Ltd pays 19 per cent corporation tax, GILTI usually does not bite. If it is a Dubai entity paying zero, GILTI imputes that income to you at US rates, minus a 10 per cent return on tangible assets (usually negligible for SaaS or consulting).

• Subpart F: passive income (interest, royalties, rent from unrelated parties), certain sales/services income involving related parties.
• GILTI: active business income taxed abroad below ~13.125% after deductions. Applies even if you reinvest every cent offshore.
• Form 8992 (C-corps) or direct inclusion on Schedule 1 (individuals): mandatory disclosures, complex calculations, often requiring specialist software.

The mechanics: you include the pro-rata share of your CFC's earnings on your 1040, pay US tax at ordinary income rates (up to 37 per cent federally), claim a foreign tax credit for the UK corporation tax already paid, and repeat every year. The foreign tax credit rarely covers the full amount if the foreign rate is below the US rate, so you pay the difference. One client — US-Canadian dual, Toronto-based, owning a BVI holding company with $920k investment income — paid $74,000 additional US tax in 2024 because the BVI rate was zero and Subpart F captured every dollar.

PFIC: the silent killer for non-corporate entities

Now pivot. You own a non-US entity that is not a CFC — perhaps 8 per cent of a Cayman fund, or a minority stake in a friend's Hong Kong Ltd. If that entity derives 75 per cent or more of its income from passive sources, or holds 50 per cent or more of its assets for passive income production, it is a Passive Foreign Investment Company under section 1297.

PFIC taxation is punitive by design. The default regime treats all gains and distributions as ordinary income, applies the highest marginal rate for every year you held the investment, adds interest (compounded), and denies long-term capital-gains treatment. A $50k gain on a PFIC you held for five years can generate a $30k tax bill plus $8k interest, even if you would have paid $7.5k under normal capital-gains rules.

Two elections soften the blow: mark-to-market (section 1296) and Qualified Electing Fund (QEF, section 1295). Mark-to-market requires annual reporting of unrealised gains and works only if the PFIC shares are marketable (rare). QEF requires the foreign entity to provide a PFIC Annual Information Statement — most non-US companies refuse because they have no US reporting obligations. In practice, many US persons end up trapped in the default excess-distribution regime.

Form 8621 is due for every PFIC, every year, even if there are no transactions. Miss it, and the statute of limitations never closes on your entire tax return for that year — the IRS can audit indefinitely. We advised a Silicon Valley founder in 2022 who had held shares in a Maltese software company (15 per cent stake, $190k initial investment) for seven years without filing 8621. When he sold for $880k, the default PFIC calc produced a $312k federal liability plus $41k interest. A timely QEF election would have capped it at $97k.

Form 8938 and FBAR: the double reporting

FATCA introduced Form 8938 (Statement of Specified Foreign Financial Assets) in 2011. If you live abroad and the aggregate value of your foreign financial assets exceeds $200k on the last day of the tax year (or $300k at any point), you must file it with your 1040. 'Financial assets' includes foreign bank accounts, foreign securities, interests in foreign entities, foreign pensions, and foreign life-insurance cash values.

FBAR (FinCEN Form 114) predates FATCA. It requires separate filing if the aggregate balance of your foreign financial accounts exceeds $10k at any moment during the year. Foreign entity ownership sometimes triggers FBAR if you have signature authority or a greater-than-50-per-cent ownership interest in the entity's accounts.

• Form 8938: filed with IRS alongside 1040, due date same as tax return, penalties $10k base plus $10k/month continuation up to $60k.
• FBAR: filed separately with FinCEN by 15 April (auto-extended to 15 October), no tax owed but civil penalties up to $10k per non-wilful violation, $100k or 50% of account balance per wilful violation.
• Overlap: a foreign account or foreign-entity ownership may require both forms. No exception if you report one; both are mandatory.

The distinctions matter. FBAR has no monetary threshold for signature authority if you work for a foreign employer; 8938 does not care about signature authority, only ownership or beneficial interest. A UK-based US citizen earning £90k, holding £45k in a Barclays current account, and owning 25 per cent of a UK Ltd valued at £180k must file FBAR (account + entity signature) and 8938 (entity interest alone crosses threshold). Both. Every year.

When an LLC works better: the check-the-box escape

Single-member US LLCs are disregarded entities for US tax purposes: income and deductions flow directly to the owner's 1040, Schedule C or E, no separate corporate return. For US persons running global operations, this can sidestep the CFC, GILTI, and PFIC nightmares entirely.

A Delaware or Wyoming LLC owned 100 per cent by a US person is not a CFC (it is domestic for tax purposes), eliminates Form 5471, eliminates GILTI/Subpart F (since there is no foreign corporation), and avoids PFIC (LLC interests are not foreign). You still file Schedule C for business income or Schedule E for rentals, but the multi-form labyrinth disappears.

Trade-offs exist. Many jurisdictions treat single-member LLCs as opaque corporations for local tax, creating double taxation (US taxes the owner, the foreign country taxes the LLC). The UK, for instance, will assess a US LLC as a foreign company subject to corporation tax if it has UK-source income or a permanent establishment. The UAE does not recognise US disregarded entities — it taxes them at 9 per cent under the new CT regime. You must model both sides.

For founders serving non-US clients and seeking limited-liability protection abroad, the check-the-box election on Form 8832 can convert certain eligible foreign entities (e.g. a UK Ltd, a BV in the Netherlands) into disregarded entities for US tax. The entity remains a limited company under local law but is transparent for IRS purposes. This eliminates the CFC problem but imports all the entity's income directly onto your 1040, triggering self-employment tax on active income and losing deferral. It works cleanly when foreign tax rates are comparable to US rates and you want one consolidated filing.

Real compliance cost: the £18k baseline

Now to the numbers. The invisible line item in every US-person offshore structure is the annual CPA bill. Form 5471 alone, for a straightforward single-subsidiary CFC, runs $4,000–7,000 per entity when prepared by a competent cross-border specialist. Add Form 8621 for a PFIC? Another $2,500 minimum. Form 8938 and FBAR? Often bundled at $800–1,200 if assets are under 10 accounts.

A realistic baseline for a US founder owning one non-US operating entity (CFC, no PFIC, straightforward income) and two foreign bank accounts: £18,000 per annum in professional fees (CPA + advisory), assuming revenue above $500k. Below that threshold, some firms quote £9k–12k, but quality drops sharply. We have seen founders attempt DIY filings using TurboTax; the IRS correspondence that follows costs more to unwind than hiring competent counsel upfront.

One data point: a Los Angeles e-commerce founder, dual US-UK citizen, operated a UK Ltd (£1.4m turnover) and held a portfolio of five ETFs domiciled in Ireland (PFICs, aggregate €220k). His 2023 tax prep: $22,400 (5471, five 8621s, 8938, FBAR, state returns California + UK self-assessment coordination). He moved everything into a US LLC and closed the UK entity in 2024; compliance cost dropped to $4,100.

Structuring paths: the decision tree

If you hold a US passport and plan to incorporate outside the US, the structuring question reduces to three variables: expected foreign effective tax rate, client/investor location requirements, and your tolerance for annual compliance cost.

• High foreign tax (UK 19%, Germany 30%, France 25%): a properly structured foreign entity with substance can work. GILTI and Subpart F still apply, but foreign tax credits substantially offset US liability. Annual cost £15k–20k. You gain limited liability abroad, local credibility, easier banking.
• Low or zero foreign tax (UAE, BVI, Cayman): GILTI taxes the income at full US rates anyway, PFIC rules may apply if the entity is passive, compliance cost identical, and you gain zero deferral. Usually pointless unless non-tax commercial reasons (fund domicile, regulatory licence) require it.
• Pure US LLC: compliance cost drops to £3k–6k (single Schedule C or E, state filings). You lose foreign limited-liability recognition in many jurisdictions, may face double taxation if the LLC has local PE, but eliminate all CFC/PFIC/5471 complexity.

A fourth path: renounce US citizenship or relinquish green card. Expensive (exit tax under section 877A if net worth exceeds $2m or average annual net income tax over five years exceeds $178k in 2024, indexed annually), irreversible, but eliminates worldwide taxation and the entire reporting stack. We see this approximately once per quarter among clients who have established tax residency elsewhere, hold no US business ties, and earn the majority of income from non-US sources. Not advice — a statement of what some choose.

For founders in the building phase — revenue under $1m, lean team, product-market fit uncertain — the US LLC almost always wins. Defer the offshore entity until commercial necessity (local VAT registration, hiring abroad, investor preference) forces the question. By then you can afford the £18k compliance cost and the structural complexity pays for itself in liability protection or tax efficiency elsewhere.

Per implementare quanto descritto, il team Iverex Global (Mayfair, Londra) offre advisory dedicata su strutturazione, banking, trust e compliance. Prenota una call.

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