Many US entrepreneurs come to Spain and form a Sociedad Limitada (SL) to operate their new company. An SL can be the right structure for certain companies as they offer limited liability and some fiscal advantages. However many that set up SL´s in Spain don´t realize that the IRS wants to know about your SL and the profits and dividends that the SL generates. A US owned Sociedad Limitada could be considered a CFC (Controlled Foreign Corporation) which requires the annual filing of a complicated and time consuming tax form called the 5471. Certain types of the SL´s income may be considered Subpart F income which can be taxed in the US. Subpart F income rules can be quite complicated.
Failure to file the 5471 on time can result in a $10,000 fine unrelated to any tax liabilities arising from the form. Bank accounts and investments the company holds need to be reported in a business owners annual FBAR filing and some investments may fall under PFIC (Passive Foreign Investment Company) rules. Taking these rules into consideration, in addition to local Spanish reporting rules, many US entrepreneurs in Spain may want to set up as Autonomo during the early stages of their startups. If you already have an SL and haven´t been paying attention to the US tax rules concerning foreign corporations it is in your best interest to get into compliance.
For more information contact Thomas at Wicklow Tax
(+34) 678 68 71 05