Form 8858 for a UK branch or disregarded entity

Who has to file Form 8858 for a UK entity or branch

The current instructions require Form 8858 from US persons that are tax owners of foreign disregarded entities, that operate a foreign branch, or that own certain interests in a controlled foreign corporation or controlled foreign partnership that does. A US citizen or resident alien is a US person, so a US citizen living in London is within the rule.

The instructions sort filers into categories. A Category 1 filer is directly the tax owner of a foreign disregarded entity, or operates a foreign branch, at any time in the tax year. A Category 2 filer holds the entity or branch indirectly through one or more tiers of disregarded entities. Both complete the whole form, including the separate Schedule M. The tax owner is the person treated as owning the entity's assets and liabilities for US income tax.

The reach goes beyond direct owners. Where a controlled foreign corporation is the tax owner or runs the branch, some of its Form 5471 filers also file Form 8858, and the same applies to some Form 8865 filers of a controlled foreign partnership. The groups that most often meet the form in a UK setting are these.

• A US citizen whose single-owner UK limited company has elected to be disregarded
• A US individual or US company carrying on business through a UK office or branch
• A US shareholder of a UK company that itself owns a disregarded subsidiary
• A US partner in a controlled foreign partnership with a UK branch or disregarded entity

When does a UK limited company become a disregarded entity

Only when its single owner elects. A UK private limited company is a corporation for US tax by default, and it becomes a foreign disregarded entity if it files Form 8832 (opens the official IRS page in a new tab) choosing that classification. A UK public limited company is on the list of entities that are always corporations and cannot elect.

The Form 8858 instructions define a foreign disregarded entity as an entity not created or organised in the United States that is disregarded as separate from its owner under the classification regulations. A company with two or more owners cannot be disregarded; if it elects, it becomes a partnership and moves into Form 8865 territory. Our post on the check-the-box election for a UK limited company covers the choice itself, including the deemed liquidation that applies when an established company elects.

The election also changes the identifying number on Form 8858. The instructions say a foreign entity needs an employer identification number to file Form 8832, and that the new number goes on the form for the first year it is disregarded, with any reference number used earlier shown beside it. A branch does not file Form 8832 and may have no EIN, in which case the filer assigns its own reference ID and uses it consistently every year.

What counts as a UK branch of a US person

A foreign branch, for Form 8858, is defined by the section 367 regulations as an integral business operation carried on by a US person outside the United States, and it also includes a foreign qualified business unit. Individuals can have one, as can companies, partnerships, trusts and estates.

Whether UK activity amounts to a branch depends on the facts. The regulations point to a separate set of books and records and a fixed office or place of business where the US person's employees or officers carry on the activity. They also treat activity that is a permanent establishment under a US tax treaty as a foreign branch. The Form 8858 instructions add that the existence or absence of separate books may affect whether a trade or business qualifies.

On the UK side, the GOV.UK page on Corporation Tax (opens the official GOV.UK page in a new tab) says a foreign company with a UK branch or office pays Corporation Tax on the profits of its UK activities. A US company that opens a London office therefore usually has a UK tax return to file and a Form 8858 to attach to its own US return.

What goes on Form 8858 and Schedule M

Form 8858 reports the entity or branch as a set of accounts. The first page identifies the filer, the tax owner and the entity or branch, with its functional currency entered as a three-letter code, GBP for sterling. The schedules then give an income statement, a balance sheet, other information, the taxable income computation and the income taxes paid.

The income statement on Schedule C and the balance sheet on Schedule F are summaries prepared under US accounting principles. The instructions require amounts in the functional currency and in dollars, and every exchange rate is reported as the number of units of foreign currency equal to one dollar. Schedule J lists foreign income taxes paid or accrued, which for a UK entity means Corporation Tax, by year and by credit category.

Schedule M reports transactions between the entity or branch and the filer or other related entities, and it must be filed with Form 8858 whenever such transactions took place. Where the tax owner is the US person filing, the instructions say dealings with that owner are not entered in the filer's column, and the schedule captures dealings with companies and partnerships the filer controls. Lines 20 and 21 ask for the largest outstanding loan balances during the year, not year-end figures.

• Page 1: filer, tax owner, EIN or reference ID, country and functional currency
• Schedule C: summary income statement in sterling and in dollars
• Schedule C-1: section 987 currency gain or loss on remittances
• Schedule F: summary balance sheet translated into dollars
• Schedules G, H and J: other information, taxable income and income taxes
• Schedule M: transactions with the filer and other related entities

How is Form 8858 filed with the US return

It is attached to the tax owner's income tax return or information return and is due on the same date, including extensions. A filer who is not the tax owner attaches it instead to the Form 5471 or Form 8865 filed for the controlled foreign corporation or partnership that owns the entity or runs the branch.

For an individual, that return is usually Form 1040 (opens the official IRS page in a new tab). The instructions say someone filing Form 1040 electronically attaches Form 8858 to Form 8453, while Form 1120 and Form 1065 filers attach it electronically to the return. For a US citizen in the UK on a calendar year, the return is due on 15 April, with the automatic extension to 15 June for filers abroad and a further extension to 15 October on Form 4868, and Form 8858 follows the return.

The annual accounting period on the form is the tax owner's tax year, so a UK company with a March year end is reported for its US owner's calendar year, which needs a second set of figures. A separate Form 8858 is required for each entity and each branch, including each tier. The Initial box is ticked in the year the entity or branch is formed or acquired, and the Final box in the year it ends. A dormant entity may use the summary filing in Announcement 2004-4.

What are the penalties for a missing Form 8858

The instructions apply the section 6038 penalties. A fixed dollar penalty is charged for each annual accounting period for which the information is not furnished on time, and further penalties accrue for each further period the failure continues after the IRS has sent notice, up to a cap. The amounts are set out in the current instructions.

There is a second consequence. A person who fails to file or report all of the required information is subject to a reduction in the foreign taxes available for credit, which grows if the failure continues after notice. For a US owner whose UK Corporation Tax is the main defence against double tax, that reduction can matter as much as the dollar penalty. Criminal penalties may also apply, and the instructions warn that someone who relies on another person to file can still be penalised if that form is wrong.

Missed years can be caught up. The IRS delinquent international information return submission procedures (opens the official IRS page in a new tab) let a taxpayer who is not under examination or investigation, and has not been contacted about the returns, attach the late forms to an amended return with a reasonable cause statement. The IRS page says penalties may still be assessed. Our IRS representation service deals with notices where one has been charged.

A worked example for a founder in Bristol

A US citizen living in Bristol formed a UK limited company for her design consultancy, owns every share and elected on Form 8832 for it to be disregarded from formation. From the effective date she files Form 8858 with her Form 1040 each year in place of the Form 5471 described in our post on Form 5471 for a one-person UK limited company.

The company's profit is reported on her return as it is earned, and the Corporation Tax it pays appears on Schedule J. The Form 1116 instructions (opens the official IRS page in a new tab) describe a foreign branch category for business profits attributable to a qualified business unit abroad, and which category her income falls into is a point to review before the credit is worked out on Form 1116. Her company's March year end means its figures are recast for her calendar year.

If she later opens a small office in Dublin through the company, that may be a branch of a disregarded entity and need its own Form 8858. Our international tax team prepares the forms from the UK accounts, and our business tax returns service handles the company's UK filings. Our Form 8858 page summarises the form, and the guide to US-UK tax for founders, fund managers and executives shows how the election sits with pay, equity and a later sale.