A foreign-owned entity with US-source income or a US corporate structure faces a sharply changed reporting environment in 2025 and 2026. US tax legislation has expanded disclosure obligations for foreign entities, and the penalties for non-compliance are severe. Missing a filing deadline can trigger automatic monetary penalties and, in aggravated cases, can expose the entity to extended audit periods under US federal tax law.
Updated US tax reporting rules require foreign entities with US operations, US-source income, or interests in US pass-through structures to file expanded informational returns with federal tax authorities. The changes take effect for tax years beginning on or after January 1, 2025, with the first compliance deadline falling in the spring of 2026. Entities that fail to file – or file incorrectly – face automatic penalties under US tax legislation and may lose the benefit of applicable tax treaty positions.
This alert sets out which entities are affected, the threshold criteria that trigger new obligations, the compliance deadline, and five immediate actions every international company should take now.
What changed and when it takes effect
US tax legislation has historically required foreign entities engaged in a US trade or business to report income attributable to a permanent establishment in the United States. The 2025 changes extend reporting obligations in three significant ways.
First, the definition of "US-source income" subject to withholding tax has been clarified to capture a wider range of digital and service-derived payments. Foreign entities receiving royalties, service fees, or data-licensing revenues from US counterparties must now assess whether those receipts fall within the expanded withholding tax regime.
Second, foreign entities holding interests in US pass-through structures – including Delaware LLC vehicles structured for US market entry – must now file separate informational returns even where no corporate income tax is directly owed. A Delaware LLC treated as a partnership for US federal tax purposes is particularly affected.
Third, the information-sharing obligations under existing tax treaty networks have been tightened. Entities invoking a reduced withholding tax rate under a tax treaty must submit affirmative treaty-benefit claims alongside their annual returns, with supporting documentation on tax residency. A bare claim of treaty protection without substantiation will be treated as invalid.
The changes apply to tax years commencing on or after January 1, 2025. The first filing deadline for most affected entities falls in spring 2026, aligned with the standard US federal return calendar. Entities using a fiscal year rather than a calendar year should calculate their own deadline from their year-end date.
Which entities are affected and threshold criteria
The following categories of foreign entity must assess their position immediately.
- Foreign corporations with a US permanent establishment or with US-source income above the applicable reporting threshold
- Foreign partnerships and their non-US partners receiving allocations of US-source income
- Foreign entities holding interests in US LLCs – including Delaware LLC structures – that are treated as partnerships for federal tax purposes
- Non-US holding companies that own US subsidiaries and receive dividends, interest, or royalties subject to withholding tax
- Foreign individuals acting as directors or majority shareholders of US entities who have filing obligations linked to their corporate income tax position
The threshold criteria are not uniform. For withholding tax purposes, the obligation arises on the first dollar of US-source income subject to withholding. For informational reporting tied to pass-through structures, the trigger is ownership of any interest – however small – in a US partnership or LLC. Tax residency documentation is required regardless of the income level involved.
Entities that have previously relied on informal treaty positions, or that structured their US operations without obtaining a formal tax residency certificate from their home jurisdiction, are at elevated risk. US tax authorities – operating through the federal system rather than any single state body – have increased audit activity directed at foreign-owned US structures.
For a tailored review of your entity's US tax reporting position, contact our team at Ferraz & Whitmore's US tax law practice or email info@ferrazwhitmore.com.
Immediate actions for international companies
The following five steps should be initiated without delay.
1. Audit your US structure. Identify every US entity – including any Delaware LLC – in which the group holds an interest. Confirm the federal tax classification of each vehicle. A LLC that has not filed an entity-classification election may have a default classification that triggers unexpected reporting obligations.
2. Obtain or update tax residency documentation. Any entity invoking a tax treaty position must hold a valid tax residency certificate issued by the competent authority of the treaty partner jurisdiction. Certificates issued more than twelve months before the filing date may not be accepted.
3. Review withholding tax positions on US-source payments. Payments received from US counterparties should be reviewed against the current withholding tax rates applicable to your entity's classification. Where a reduced rate applies under a tax treaty, confirm that the payor has received the required documentation.
4. Assess permanent establishment exposure. Foreign companies with US-based personnel, offices, or agents should assess whether those activities constitute a permanent establishment under the relevant tax treaty. A permanent establishment triggers corporate income tax liability in the United States – not merely withholding tax.
5. Confirm filing deadlines and extension options. Most foreign entities must file by the standard spring deadline. Extensions are available under US tax legislation but must be requested before the original deadline. An unfiled extension request does not automatically suspend the penalty clock.
Corporate structure questions arising from these changes – including decisions about restructuring a Delaware LLC or inserting an intermediate holding entity – are addressed in our overview of corporate law matters in the United States. Entities with parallel reporting obligations in Brazil should also consult our related alert on 2025 tax reporting changes in Brazil.
About Ferraz & Whitmore
Ferraz & Whitmore is an international law firm based in Lisbon, advising business clients across 46 jurisdictions. Our tax law practice covers US federal tax reporting, withholding tax compliance, tax treaty analysis, and permanent establishment assessment for foreign entities operating in the United States. We work with international entrepreneurs, institutional investors, and in-house legal teams who need results-oriented counsel across multiple legal systems. Engaging a lawyer with cross-border US tax experience – one who understands both civil law structures and common law systems – is essential when navigating the expanded US reporting regime. As an international law firm advising on US matters, Ferraz & Whitmore combines Portuguese civil law expertise with English common law tradition to deliver practical solutions for cross-border clients. To discuss your entity's compliance position before the spring 2026 deadline, contact us at info@ferrazwhitmore.com.
Disclaimer: This publication is provided for informational purposes only and does not constitute legal advice. The information herein should not be relied upon as a substitute for professional legal counsel tailored to your specific circumstances. Ferraz & Whitmore assumes no liability for actions taken or not taken based on the contents of this material. For advice regarding your particular situation, please contact info@ferrazwhitmore.com.