Key Takeaways
Form 8858 vs Form 8865:
- Form 8858 reports foreign disregarded entities (single tax owner)
- Form 8865 reports foreign partnerships (multiple owners)
- Entity classification rules determine which form applies
- Some structures require both forms
- Penalties: $10,000+ for each missed filing
Table of Contents
Introduction
Both foreign disregarded entities (FDEs) and foreign partnerships are pass-through entities for U.S. tax purposes, meaning income flows through to the owners. However, they require different IRS forms: Form 8858 for FDEs and Form 8865 for foreign partnerships.
The distinction comes down to how many owners the entity has. A single-owner entity is typically disregarded (Form 8858), while a multi-owner entity is typically a partnership (Form 8865). But the analysis isn’t always straightforward, especially when ownership changes or when one type of entity owns another.
This guide explains the differences between these forms, when each applies, and how to handle structures where both forms are required.
What is Form 8858?
Form 8858 reports foreign disregarded entities and foreign branches owned by U.S. persons. The form captures the FDE’s financial information, organizational structure, and transactions with related parties.
Key Characteristics:
- Reports single-owner foreign entities (disregarded for U.S. tax)
- Reports foreign branches of U.S. businesses
- No ownership percentage threshold
- Can be attached to Form 5471 or Form 8865 if the FDE is owned by a CFC or foreign partnership
For complete details, see our Form 8858 Foreign Disregarded Entity Guide.
What is Form 8865?
Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships,” reports interests in foreign partnerships. It’s structurally similar to Form 1065 (the domestic partnership return) but is filed by individual U.S. partners, not by the partnership itself.
Four Categories of Form 8865 Filers:
Category 1: Controlling U.S. Persons U.S. persons who controlled the foreign partnership at any time during the year. Control means ownership of more than 50% of the partnership’s capital, profits, or deductions/losses.
Category 2: 10% Partner in U.S.-Controlled Partnership U.S. persons who owned 10% or more of a foreign partnership that’s controlled by U.S. persons (in aggregate).
Category 3: Property Contributors U.S. persons who contributed property to a foreign partnership in exchange for a partnership interest (with some exceptions).
Category 4: Certain Acquisitions, Dispositions, or Changes U.S. persons who acquired, disposed of, or had changes in their interest resulting in crossing the 10% threshold.
See our Form 8865 Foreign Partnership Guide and Form 8865 Categories Guide for complete details.
Side-by-Side Comparison
| Feature | Form 8858 | Form 8865 |
|---|---|---|
| Entity Type | Foreign Disregarded Entity, Foreign Branch | Foreign Partnership |
| Number of Owners | One (single owner) | Multiple owners |
| Tax Treatment | Ignored for U.S. tax (flow-through to single owner) | Partnership taxation (flow-through to partners) |
| Ownership Trigger | 100% tax owner | Various (control, 10%+, contributions) |
| Category System | None | 4 categories with different requirements |
| Primary Schedules | C-1, G, H, I, J, M | K, K-1, K-2, K-3, L, M, M-1, M-2, N, O |
| Partnership Allocations | Not applicable | Yes (income, deductions, credits) |
| Initial Penalty | $10,000 | $10,000 |
| Maximum Penalty | $50,000 | $50,000 |
| Where Filed | With primary return or attached to 5471/8865 | With primary return |
Entity Classification: The Key Distinction
The fundamental distinction between Form 8858 and Form 8865 is the number of owners. Entity classification rules under Treasury Regulations Section 301.7701 determine how foreign entities are treated.
Default Classification Rules
Entities with One Owner: An eligible entity with a single owner is disregarded by default (no election needed). The entity is ignored, and its owner reports all items directly.
Entities with Two or More Owners: An eligible entity with multiple owners is treated as a partnership by default. The entity is recognized, and partners report their share of partnership items.
Check-the-Box Elections
Eligible entities can elect different treatment by filing Form 8832:
- A single-owner entity can elect to be treated as a corporation
- A multi-owner entity can elect to be treated as a corporation
- A corporation cannot elect partnership or disregarded status
Per Se Corporations
Some foreign entities are automatically treated as corporations regardless of the number of owners. These “per se corporations” are listed in Treasury Regulations Section 301.7701-2(b)(8) and include entities like:
- UK Public Limited Company (PLC)
- German Aktiengesellschaft (AG)
- French Société Anonyme (SA)
- Japanese Kabushiki Kaisha (KK)
Per se corporations require Form 5471, not Form 8858 or Form 8865.
When Classification Changes
If entity ownership changes, classification may change:
New Owner Joins Single-Member Entity: If someone joins your single-member FDE, it becomes a multi-owner entity. The entity is now treated as a partnership, and Form 8865 applies instead of Form 8858.
Owner Leaves Multi-Owner Entity: If a partner leaves and only one owner remains, the entity becomes disregarded. Form 8858 applies instead of Form 8865.
These changes can trigger deemed transactions with tax consequences.
When Do You File Form 8858?
Form 8858 is required when you’re the tax owner of an FDE or operate a foreign branch.
Direct FDE Ownership: You directly own 100% of a foreign entity treated as disregarded.
FDE Owned by CFC: You file Form 5471 for a controlled foreign corporation, and that CFC owns an FDE. Form 8858 attaches to Form 5471.
FDE Owned by Foreign Partnership: You file Form 8865 for a foreign partnership, and that partnership owns an FDE. Form 8858 attaches to Form 8865.
Foreign Branch: Your U.S. business operates a foreign branch (not a separate legal entity).
There’s no threshold. If you own an FDE, you file Form 8858.
See Who Must File Form 8858 for complete details.
When Do You File Form 8865?
Form 8865 is required when you fall into one of four filer categories based on your interest in a foreign partnership.
Category 1: Controlling U.S. Persons
You’re a Category 1 filer if you controlled the foreign partnership at any time during the year. Control exists if U.S. persons own more than 50% of:
- Partnership capital
- Partnership profits
- Partnership deductions/losses
Category 1 filers have the most extensive requirements, filing a complete partnership return with all schedules.
Category 2: 10% Partner in U.S.-Controlled Partnership
You’re a Category 2 filer if:
- You owned 10% or more of the partnership, AND
- U.S. persons collectively controlled the partnership
Category 2 filers have somewhat reduced requirements compared to Category 1.
Category 3: Property Contributors
You’re a Category 3 filer if you contributed property to a foreign partnership in exchange for a partnership interest. This category focuses on Schedule O reporting of the contribution.
Category 4: Acquisitions, Dispositions, Changes
You’re a Category 4 filer if you:
- Acquired an interest that brought ownership to 10% or more
- Disposed of an interest that dropped ownership below 10%
- Had a change in proportionate interest of 10% or more
Category 4 is typically a one-time filing for the year of the triggering event.
For detailed category analysis, see our Form 8865 Categories Guide.
When You Need Both Forms
Some structures require both Form 8858 and Form 8865. This happens when a foreign partnership owns a foreign disregarded entity.
Foreign Partnership Owns FDE
Structure:
U.S. Person A (60% owner) U.S. Person B (40% owner) ↓ UK LLP (foreign partnership) → Form 8865 ↓ owns 100% Swiss GmbH (FDE) → Form 8858 attached to Form 8865
Filing Requirements:
Person A (Category 1 filer):
- Files Form 8865 for UK LLP
- Attaches Form 8858 for Swiss GmbH to Form 8865
Person B (Category 2 filer, potentially):
- May file Form 8865 depending on category requirements
- Would attach Form 8858 if filing Form 8865
Multiple FDEs Under Partnership
If the foreign partnership owns multiple FDEs, each FDE requires its own Form 8858 attached to Form 8865.
Example:
Foreign partnership owns:
- German FDE → Form 8858 #1
- French FDE → Form 8858 #2
- Spanish FDE → Form 8858 #3
All three Form 8858s attach to the single Form 8865
Schedule M Coordination
When an FDE is owned by a foreign partnership, Schedule M on Form 8858 should reflect transactions between the FDE and the partnership (and other related parties). These amounts should be consistent with Form 8865 reporting.
Penalty Comparison
Both forms carry significant penalties for non-compliance.
Form 8858 Penalties:
- Initial penalty: $10,000 per form, per year
- Continuation penalty: $10,000 per 30 days after IRS notice
- Maximum penalty: $50,000 per form, per year
Form 8865 Penalties:
- Initial penalty: $10,000 per form, per year
- Continuation penalty: $10,000 per 30 days after IRS notice
- Maximum penalty: $50,000 per form, per year
- Category 3: 10% of FMV of contributed property (up to $100,000)
Stacking Penalties:
When both forms are required and neither is filed, penalties can stack. Missing a Form 8865 with attached Form 8858 could result in penalties for both forms.
For relief options, see:
Common Scenarios
Scenario 1: Two U.S. Persons Own Foreign Entity
Situation: You and your spouse (both U.S. citizens) jointly own a Mexican entity holding rental property.
Analysis: The entity has two owners, so it’s not a disregarded entity. It’s treated as a partnership.
Filing: Form 8865 (if you meet category requirements), not Form 8858.
Scenario 2: U.S. Person and Foreign Person Own Entity
Situation: You (U.S. citizen) and your Canadian business partner own a Canadian entity 50/50.
Analysis: Two owners means partnership treatment. The fact that one owner is foreign doesn’t change this.
Filing: You file Form 8865 (if you meet category requirements). Your Canadian partner has no U.S. filing obligation.
Scenario 3: Foreign Partnership with FDE Subsidiary
Situation: You’re a 60% owner of a UK LLP. The LLP owns 100% of a Swiss entity (treated as disregarded).
Analysis:
- UK LLP is a foreign partnership (two or more owners)
- Swiss entity is an FDE (single owner: the LLP)
Filing:
- Form 8865 for UK LLP (you’re a controlling Category 1 filer)
- Form 8858 for Swiss entity (attached to your Form 8865)
Scenario 4: Partner Leaves, Entity Becomes FDE
Situation: Your foreign partnership had two U.S. owners. One owner sold their interest, leaving you as the sole owner.
Analysis:
- Before sale: Multi-owner partnership (Form 8865)
- After sale: Single-owner disregarded entity (Form 8858)
Filing:
- Form 8865 for the period of partnership status
- Form 8858 for the period of disregarded status
- Potential deemed liquidation/reformation for tax purposes
Frequently Asked Questions
Can a foreign entity be both an FDE and partnership?
No. An entity is either disregarded (one owner) or a partnership (multiple owners). It can’t be both simultaneously. However, classification can change if ownership changes.
What if ownership changes mid-year?
You file based on the entity’s status during each period. If ownership changed from partnership to FDE mid-year, you might file Form 8865 for part of the year and Form 8858 for the rest. Consult a tax professional for the deemed transaction implications.
Do I file Form 8858 if I’m a limited partner in a foreign partnership?
If you’re just a partner in a foreign partnership, you potentially file Form 8865 (depending on your category). You don’t file Form 8858 for the partnership itself. However, if the partnership owns an FDE and you file Form 8865, you’d attach Form 8858 to your Form 8865.
How do check-the-box elections affect filing?
A check-the-box election can change an entity’s classification:
- Single-owner FDE elects corporation status → File Form 5471, not Form 8858
- Multi-owner partnership elects corporation status → File Form 5471, not Form 8865
- Elections are filed on Form 8832
What if the foreign partnership has no U.S. activities?
Form 8865 requirements depend on your ownership and category, not on whether the partnership has U.S. activities. A foreign partnership with entirely foreign operations may still trigger Form 8865 for its U.S. partners.
When to Get Professional Help
Consider professional assistance when:
- Multi-entity structures involve both FDEs and partnerships
- Ownership is changing and you need to understand the implications
- Entity classification is unclear and you need a formal analysis
- Penalty concerns require navigation of relief options
- You need to coordinate Form 8858, Form 8865, and potentially Form 5471
SDO CPA specializes in international tax compliance and can analyze your structure to determine the correct forms and filing approach.
Conclusion
Form 8858 and Form 8865 serve different purposes based on entity classification. Single-owner entities are disregarded (Form 8858), while multi-owner entities are partnerships (Form 8865).
When a foreign partnership owns an FDE, both forms are required. Form 8858 attaches to Form 8865, creating a multi-layered reporting structure. Getting the classification right is essential because the wrong form doesn’t satisfy your filing obligation.
If you’re unsure which forms apply to your international structure, professional guidance can prevent costly mistakes and penalties.
Get Help with Your International Tax Forms
Related Resources
- Form 8858 Foreign Disregarded Entity Guide
- Form 8865 Foreign Partnership Guide
- Form 8858 vs Form 5471 Comparison
- Form 8865 Categories of Filers
- Form 8858 Penalties and Relief
- Form 8865 Penalties and Relief
- Form 8858 Schedule M Instructions
- Form 8865 Schedule O Property Transfers
- Form 8858 Filing Services
- International Tax Services
This article is for informational purposes only and does not constitute tax or legal advice. Consult a qualified tax professional for advice specific to your situation.