For many US citizens living abroad, opening a company or holding assets through a foreign structure feels like a natural part of doing business internationally. Whether it’s a small consultancy in the UK, a rental property company in Europe, or a digital services company registered in Asia—foreign entities can offer simplicity, local compliance, and access to new markets.
But from the IRS perspective, things look very different.
Foreign Disregarded Entities (FDEs) are one of the most misunderstood areas of international tax law for US expats. Getting them wrong can lead to unexpected tax bills, penalties, and intensive reporting requirements. Getting them right, however, allows expats to operate globally with confidence and compliance.
This guide breaks down everything US expats need to know.
1. What Is a Foreign Disregarded Entity (FDE)?
A Foreign Disregarded Entity is a non-US company or business structure that is treated as “disregarded” for US tax purposes, meaning the entity itself is ignored, and the owner is taxed directly.
In simple terms:
Your foreign company still exists locally in the country where it was formed, but to the IRS, it is you — the owner — who is responsible for reporting all its income, expenses, and activity.
Common examples:
- UK LLPs with a single US member
- Australian sole trader Pty Ltd structures (single-owner)
- Single-member foreign limited liability companies
- Certain trusts or partnerships that the owner elects to treat as disregarded
If you own 100% of the entity, it often defaults to FDE treatment unless you elect otherwise.
2. How Does the IRS View a Foreign Disregarded Entity?
For US purposes:
✔ The IRS ignores the entity as a separate taxpayer
✔ All income flows directly to the owner
✔ The owner must report business activity on their US tax return
✔ Special forms and reporting rules apply
However, the foreign country still treats the company as a separate legal entity.
This mismatch is where most expats get confused.
3. Reporting Requirements for Foreign Disregarded Entities
If you own an FDE, the IRS expects specific filings — even if the business had no income.
Required Forms (Most Common)
1. Form 8858 – Information Return of U.S. Persons With Respect to Foreign Disregarded Entities
This is the core filing.
You must file Form 8858 if:
- You own 100% of a foreign entity
- You made an election to be treated as disregarded
- The entity is considered “per se disregarded”
Form 8858 includes:
- Balance sheets
- Income statements
- Transactions with the owner
- Local tax payments
- Business description and operations
Penalties for not filing: up to $10,000 per year, per entity.
2. FBAR (FinCEN 114)
If your disregarded entity has foreign bank accounts, those accounts count as your accounts.
FBAR required if:
✔ Total foreign account balances exceed $10,000 at any time in the year.
3. Form 8938 (FATCA)
Report the FDE’s assets if thresholds are met — $50,000–$600,000 depending on filing status and residency.
4. Form 5472 (in rare cases)
If your FDE is foreign-owned and treated as a US disregarded entity, Form 5472 may apply.
This is less common for expats but extremely strict — penalties start at $25,000.
5. Income Reporting
Income from an FDE is typically reported on:
- Schedule C (sole proprietorship-style business)
- Schedule E (rentals or pass-through structures)
The owner is fully responsible for US tax liability.
4. Tax Implications for US Owners of FDEs
Owning an FDE can trigger several tax outcomes:
✔ Self-employment tax may apply
If the business is treated as a sole proprietorship for US purposes, the owner may owe 15.3% self-employment tax, unless a Totalization Agreement applies (e.g., UK, Australia, EU countries).
✔ Foreign tax credits (FTC) may reduce US tax
Taxes paid abroad can offset US tax, but record-keeping is essential.
✔ Double taxation is possible if not structured correctly
An entity that the foreign country taxes as a corporation can create conflict unless handled carefully.
✔ Local country tax rules still apply
Even though the IRS “ignores” the entity, the foreign government does not.
You must follow:
- Corporate tax rules
- VAT/GST rules
- Local reporting and audits
5. Benefits of Using a Foreign Disregarded Entity
Despite the complexity, FDEs offer real advantages for expats:
✔ Simplicity for US tax reporting
Income is reported directly — no complex foreign corporate returns.
✔ Useful for small businesses or freelancers
A single-owner consulting, tech, or service business often works well in FDE format.
✔ Avoids Subpart F/GILTI rules
Since the entity is disregarded, certain corporate anti-deferral rules do not apply.
✔ Seamless integration with foreign business environments
You operate normally in your country of residence without US corporate compliance.
6. Risks and Common Mistakes Expats Make
1. Failing to file Form 8858
One of the most penalized international tax forms.
2. Treating the business as a corporation locally AND in the US
Mismatch creates double taxation.
3. Incorrect bookkeeping
Because US and foreign accounting rules differ, financials often must be converted.
4. Ignoring GST/VAT obligations
Even if disregarded for US tax, the business must still comply locally.
5. Not realizing rental companies can be FDEs
Foreign holding companies for rental properties often qualify.
7. Should You Elect Corporate Status Instead?
Some expats choose to file Form 8832 (Entity Classification Election) to treat the foreign company as a corporation for US purposes.
This may be beneficial if:
- You want to protect income from US self-employment tax
- The foreign country already taxes it like a corporation
- You want to prevent income from flowing through directly
However, electing corporate status adds:
- Corporate reporting
- Potential GILTI/Subpart F complications
- More filing obligations
Consulting a professional is recommended before making elections.
8. How to Stay Compliant in 2026 and Beyond
To avoid penalties and IRS scrutiny:
✔ Track all business activity year-round
Revenue, expenses, transfers, assets, and bank balances.
✔ File Form 8858 annually
Even if the business is inactive.
✔ Report all foreign bank accounts
FBAR and FATCA rules apply.
✔ Maintain separate business and personal accounts
FDEs require clear audit trails.
✔ Understand how your country taxes your entity
Don’t rely solely on US rules.
✔ Seek professional guidance for entity elections
The wrong choice can create unnecessary tax obligations.
Conclusion
Foreign Disregarded Entities give US expats flexibility to run businesses abroad, but they come with complex tax rules and strict reporting requirements. Understanding how the IRS treats FDEs—especially regarding Form 8858, FATCA, and FBAR—is essential to staying compliant.
Handled correctly, an FDE can be one of the best structures for expats running small-to-medium businesses overseas. Handled incorrectly, it can trigger thousands of dollars in penalties and significant tax complications.
If you want more detailed information about FDE, visit Expat US Tax.
