Form 5471 Who Must File & Report a Foreign Corporation to IRS
Form 5471
Form 5471 : Form 5471 is used to report foreign corporations to the IRS. Technically, the form is referred to as the Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The Form is generally due to be filed by U.S. taxpayers at the time their tax return is due. Even if a person is not required to a file a tax return, the Form 5471 is still required. The failure to file the form timely may result in fines and penalties, but the IRS offers various tax amnesty disclosure, collectively referred to as “voluntary disclosure.” Unlike the FBAR and the Form 8938 which primarily focuses on the value of assets for reporting purposes, the 5471 is a “tax return” for your foreign business.
There are five (5) different categories of filers, and many different schedules a filer may have to file.
We will reproduce sections of the Form 5471 instructions and provide guidance some additional guidance
Let’s explore the Form 5471 Categories of Filers
Who Files Form 5471?
As provided by the IRS:
“Generally, all U.S. persons described in Categories of Filers below must complete the schedules, statements, and/or other information requested in the chart, Filing Requirements for Categories of Filers, later.
Read the information for each category carefully to determine which schedules, statements, and/or information apply.
If the filer is described in more than one filing category, do not duplicate information. However, complete all items that apply.
For example, if you are the sole owner of a CFC (i.e., you are described in Categories 4 and 5), complete all six pages of Form 5471 and separate Schedules E, H, I-1, J, M, and P. Note. Complete a separate Form 5471 and all applicable schedules for each applicable foreign corporation.”
When and Where To File the 5471?
“Attach Form 5471 to your income tax return (or, if applicable, partnership or exempt organization return) and file both by the due date (including extensions) for that return.”
Important Practice Tip for all 5 Form 5471 Categories of Filers
When a filer applies for an extension on Form 4868, the 5471 goes on automatic extension as well. This is different than form 3520-A, in which a separate Form 7004 extension is required.
The first and most important aspect of the Form 5471 analysis is just determining who has to file the Form 5471.
Category 1 Filer (U.S. Shareholders)
The Category 1 filer is a common filer. It primarily relates to shareholders of foreign corporations who meet the threshold requirements for filing.
“This category includes a U.S. shareholder of a foreign corporation that is a section 965 specified foreign corporation (defined below) at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was an SFC, taking into account the regulations under section 965.
*However, see Certain Category 1 and Category 5 Filers , later, which may apply. U.S. shareholder.
For purposes of Category 1, a U.S. shareholder is a U.S. person who owns (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) 10% or more of the total combined voting power of all classes of voting stock of an SFC or, in the case of a tax year of a foreign corporation beginning after December 31, 2017, 10% or more of the total combined voting power or value of shares of all classes of stock of an SFC. U.S. person. See Category 5 Filer, later, for definition.
Section 965 specified foreign corporation (SFC). For purposes of Category 1, an SFC (as defined in section 965) is:
- A CFC (see Category 5 Filer, later, for a definition), or
- Any foreign corporation with respect to which one or more domestic corporations is a U.S. shareholder.
However, if a passive foreign investment company (as defined in section 1297) with respect to the shareholder is not a CFC, then such corporation is not an SFC. See section 965 and the regulations thereunder for exceptions.
Note. A U.S. shareholder who is a Category 1 filer (defined above) must continue to file all information required of a Category 1 filer as long as:
-
The section 965 specified foreign corporation has accumulated E&P related to section 965 that is reportable on Schedule J (Form 5471), or
-
The U.S. shareholder has previously taxed E&P related to section 965 that is reportable on Schedule P (Form 965).”
Important Practice Tip for Category 1 Filers
The IRS carved out an exception for foreign corporations that are PFIC but not CFC to the particular shareholder. If the Foreign PFIC is not a CFC, then the PFIC does not qualify as a 965 Corporation.
Category 2 Filer (Officer or Director with U.S. Person Investor)
The Category 2 filer is also relatively common. It primarily relates to shareholders of foreign corporations who are officers or directors in a foreign corporation in which as U.S. person has a stake in the company.
“This category includes a U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person (defined below) has acquired (in one or more transactions):
- Stock which meets the 10% stock ownership requirement (described below) with respect to the foreign corporation, or
- An additional 10% or more (in value or voting power) of the outstanding stock of the foreign corporation.
A U.S. person has acquired stock in a foreign corporation when that person has an unqualified right to receive the stock, even though the stock is not actually issued. See Regulations section 1.6046-1(f)(1) for more details. 10% stock ownership requirement.
For purposes of Category 2 and Category 3, the stock ownership threshold is met if a U.S. person owns: 1. 10% or more of the total value of the foreign corporation’s stock, or 2. 10% or more of the total combined voting power of all classes of stock with voting rights. U.S. person.
For purposes of Category 2 and Category 3, a U.S. person is: 1. A citizen or resident of the United States, 2. A domestic partnership, 3. A domestic corporation, and 4. An estate or trust that is not a foreign estate or trust as defined in section 7701(a)(31). See Regulations section 1.6046-1(f)(3) for exceptions.”
Category 3 Filer (Additional Acquisition of Stock)
“This category includes:
- A U.S. person (see Category 2 Filer, above, for definition) who acquires stock in a foreign corporation which, when added to any stock owned on the date of acquisition, meets the 10% stock ownership requirement (described above) with respect to the foreign corporation;
- A U.S. person who acquires stock which, without regard to stock already owned on the date of acquisition, meets the 10% stock ownership requirement with respect to the foreign corporation;
- A person who is treated as a U.S. shareholder under section 953(c) with respect to the foreign corporation;
- A person who becomes a U.S. person while meeting the 10% stock ownership requirement with respect to the foreign corporation; or
- A U.S. person who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the 10% stock ownership requirement. For more information, see section 6046 and Regulations section 1.6046-1.”
Important Practice Tip for Category 3Filers
Bullet-point 4 is very important.
We have many individuals who believe if they owned the stock before becoming a U.S. person, they are immune – this is false, and they are imputed the value of ownership at the time of becoming a U.S. person.
Category 4 Filer (Control Test)
This category includes a U.S. person who had control (defined below) of a foreign corporation during the annual accounting period of the foreign corporation. U.S. person.
“For purposes of Category 4, a U.S. person is:
- A citizen or resident of the United States;
- A nonresident alien for whom an election is in effect under section 6013(g) to be treated as a resident of the United States;
- An individual for whom an election is in effect under section 6013(h), relating to nonresident aliens who become residents of the United States during the tax year and are married at the close of the tax year to a citizen or resident of the United States;
- A domestic partnership;
- A domestic corporation; and
- An estate or trust that is not a foreign estate or trust as defined in section 7701(a)(31). See Regulations section 1.6038-2(d) for exceptions. Control.
A U.S. person has control of a foreign corporation if, at any time during that person’s tax year, it owns stock possessing:
- More than 50% of the total combined voting power of all classes of stock of the foreign corporation entitled to vote, or
- More than 50% of the total value of shares of all classes of stock of the foreign corporation. A person in control of a corporation that, in turn, owns more than 50% of the combined voting power, or the value, of all classes of stock of another corporation is also treated as being in control of such other corporation.
Example:
Corporation A owns 51% of the voting stock in Corporation B. Corporation B owns 51% of the voting stock in Corporation C. Corporation C owns 51% of the voting stock in Corporation D. Therefore, Corporation D is controlled by Corporation A.
For more details on “control,” see Regulations sections 1.6038-2(b) and (c).”
Category 5 Filer (CFC – Controlled Foreign Corporation)
This category includes a U.S. shareholder who owns stock in a foreign corporation that is a CFC at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was a CFC.
However, see Certain Category 1 and Category 5 Filers, later, which may apply. U.S. shareholder.
For purposes of Category 5, a U.S. shareholder is a U.S. person who:
- Owns (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) 10% or more of the total combined voting power of all classes of voting stock of a CFC or, in the case of a tax year of a foreign corporation beginning after December 31, 2017, 10% or more of the total combined voting power or value of shares of all classes of stock of a CFC; or
- Owns (either directly or indirectly, within the meaning of section 958(a)) any stock of a CFC (as defined in sections 953(c)(1)(B) and 957(b)) that also is a captive insurance company. U.S. person.
For purposes of Category 5, a U.S. person is:
- A citizen or resident of the United States,
- A domestic partnership,
- A domestic corporation, and
- An estate or trust that is not a foreign estate or trust as defined in section 7701(a)(31). See section 957(c) for exceptions. CFC.
A CFC is a foreign corporation that has U.S. shareholders that own (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) on any day of the tax year of the foreign corporation, more than 50% of:
- The total combined voting power of all classes of its voting stock, or
- The total value of the stock of the corporation.
Rev. Proc. 2019-40
Certain Category 1 and Category 5 Filers may qualify for relief for certain types of Category 5 filers under Rev. Proc 2019-40
These instructions clarify that this relief is extended to similarly-situated Category 1 filers.
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