U.S. TAX GUIDE IN CHILE

Form 5471—owning a foreign corporation as a US expat in Chile.

If you’re a US expat living in Chile and you’ve started your own local business, like an LLC, the IRS considers this a foreign corporation, which means you might have some additional filing responsibilities.

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The main form you’ll need to worry about is Form 5471, which helps the IRS track your involvement in any foreign corporation.

When do I need to file Form 5471?

The general rule is that if you own 10% or more of a foreign corporation, like your Chilean LLC, you need to report it to the IRS by filing Form 5471. 

Form 5471 is filed as an attachment to the US person’s annual income tax return. It is due, on April 15 of the year following the reporting year.

The form essentially collects information about the business, such as:

  • Basic details like the company name and address.
  • Your ownership percentage in the company.
  • Some financial information, like income and expenses.


But things get a bit more complicated depending on how much of the company you own and what your role is within it. 

If you own less than 50%, the form is mainly a way of reporting to the IRS that you hold shares in a foreign business. However, if your ownership is more than 50%, or if other US persons collectively own more than 50%, you’ll need to be more detailed in your reporting.

What happens if I own more than 50%?

When you own more than 50% of the company, or if the company is majority-owned by other US persons, the IRS will consider the company’s net income taxable to you. 

This means that even if you don’t actually receive any of the company’s profits (i.e., the money stays within the company), the IRS might still tax you on your share of the income under certain rules, like Subpart F income or GILTI (Global Intangible Low-Taxed Income).

To make things a bit easier, the US tax system allows you to claim foreign tax credits for any taxes you’ve already paid in Chile. Since Chile has a corporate tax rate of around 27%, you can use that tax payment to offset your US tax liability, meaning you won’t be taxed twice on the same income.

Do I need professional help to file Form 5471?

Yes, it’s a good idea to get professional help when filing Form 5471. 

It’s a pretty complex form, and the penalties for missing or incorrectly filing it can be steep—up to US$10,000 per form, per year. Plus, the financial details you need to report can get complicated if your business is earning significant income or if you haven’t reported it in previous years.

What if I’m the only person in my company?

Here’s where things get a bit interesting. If you’ve registered an LLC in Chile for business reasons, but it’s really just you doing freelance work or contracting, the IRS still considers this a foreign corporation. 

But luckily, there’s a way to make your life a bit easier.

You can choose to treat your company as a disregarded entity for tax purposes. This means the company’s income gets treated as part of your personal income, and you avoid the complications of Form 5471. 

Instead, you report the income directly on your US tax return using Schedule C, just like any other self-employment income.

How does the US-Chile totalization agreement help?

The US and Chile have a totalization agreement, which prevents you from paying self-employment taxes in both countries. If you’re paying into Chile’s social security system, you won’t have to pay self-employment taxes in the US. 

Additionally, by choosing the disregarded entity route, you can benefit from simpler reporting, avoid the hassle of corporate filings, and take advantage of the totalization agreement to reduce your overall tax burden.

What’s the best approach for small business owners?

If you’re running a small business in Chile as a US expat, there are ways to keep things simple. First, consider whether it makes sense to elect for disregarded entity status, especially if you’re the sole owner of the company. 

This can cut down on paperwork and make tax time a lot smoother.

Secondly, if your company is paying taxes in Chile, make sure you’re claiming foreign tax credits on your US return. This helps ensure you’re not paying tax on the same income twice. And of course, it’s always worth seeking out professional advice if you’re unsure about anything.