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Foreign Person Doing Business in the US and Their Taxes

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Foreign entity and transaction reporting

As you already know, the IRS and the related judicial departments impose different taxation rules on foreign entities? 

In the USA, any foreign entity is taxed differently to maintain proper cross-border relationships. Any transaction, be it in the form of money or any tangible property, needs to be reported when filing the tax returns of every foreign entity. Several rules are there that define a foreign entity and sets it apart from the US-based entity. These rules and restrictions also define the taxation systems, which every foreign person or organization should be aware of. 

That’s why here in the open discussion, we will focus our attention on the foreign entities and the reporting process of such transactions. 

What is a foreign entity? 

From the term itself, you can understand that a “foreign entity” is defined as any individual or business organization not having a US origin. You’re considered a nonresident alien unless you meet one of two tests below:

-you are a resident alien of the United States for tax purposes if you meet either the green card test

-or the substantial presence test for the calendar year (January 1-December 31). (Read more https://www.irs.gov/individuals/international-taxpayers/determining-alien-tax-status) 

As for businesses, if a company is not registered with the US government at the time of its formation, it will be termed as a foreign company or organization. 

Types and classifications of a foreign entity

It is imperative to understand the categorization of a foreign entity as mentioned in Chapters 3 and 4 described by the IRS. A foreign entity is mainly classified based on its resident status, origin, and several such aspects. Here is a brief explanation that will clarify how to categorize yourself or your corporation accordingly: 

  1. A resident alien is a term used to describe an individual who is a non-US person but meets the green card criterion. 
  2. A nonresident alien is an individual who is neither a US person nor a resident alien nor meets the substantial presence test. 
  3. Foreign organizations and corporations are the ones not created within the US and registered under a foreign nationality. 

There are many forms that foreign persons must file.





-1120 F protective, etc

Payments to be included in the tax forms

A foreign entity or a foreign person must report US income, transactions between the US and their country, ownerships, their tax identification numbers, any activity related to the US income and assets, and of course, how much taxes are owed.


If you wonder what would happen if you neglect to file these forms, please note that the risks you will have a significant headache to resolve or pay them are huge. Penalties can be as high as $25,000 per year. I don’t wish it upon anyone to have to deal with penalties like this.


Whether we are talking about a foreign individual or a foreign corporation, every entity not having a US status but having a US connected income will be involved in some or other transactions. The transaction can be made in the form of cash payments, credit card payments, investments, transfer of intellectual properties, purchase orders from foreign entities, etc. Contact us to avoid unnecessary taxation penalties for a current or future financial year. 

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