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What Is a 5471 and When Do I Need to File One

Few things are as exciting and at the same time, challenging as starting a business overseas as an expat. Indeed, the prospect of launching a new company abroad and achieving success outside the shores of your home country can be truly exhilarating. However, along with the numerous tasks and responsibilities associated with creating and operating a business, come the tax filing obligations, in particular if you are a U.S. tax resident.

If you are a U.S. person who is an officer, director or shareholder in a foreign corporation (such as a Pty Ltd), you may need to file Form 5471 along with your federal tax return. While you may be used to filing various forms as an American expat or as a U.S. tax resident, such as Form 8938, the FBAR, and so forth, filing Form 5471 and its associated schedules can be very confusing, as well as a minefield in terms of potential tax implications.

The first step in determining your Form 5471 filing obligations is to figure out what category of filer you are. There are five categories of filers for the Form 5471, as follows:

  • Category 1: A U.S. shareholder who owns 10% or more of a specified foreign corporation
  • Category 2: A U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person has acquired 10% or more of the stock in the company (or who acquires an additional 10% or more in the company)
  • Category 3: A U.S. person who acquires stock in a foreign corporation which meets the 10% stock ownership requirement above
  • Category 4: A U.S. person who owns more than 50% of a foreign corporation. In this case, the foreign corporation would be considered a controlled foreign corporation, or CFC
  • Category 5: A U.S. shareholder who owns stock in a foreign corporation that is a CFC at any time during the year

Please note that you may be more than one category of filer during the year. For instance, if you own 100% of a foreign corporation, you would be a Category 1, 4, and 5 filer all at the same time.

To make matters worse, as of tax year 2020, Categories 1 and 5 each have subsets, such as Category 1a, 1b, and 1c, and Category 5a, 5b, and 5c. And if all of this wasn’t enough, Form 5471 consists of 16 different schedules which may have to be filed depending on various factors and the category of filer you are considered to be. Finally, the Tax Cuts and Jobs Act of 2017 created even more compliance in this area, subjecting Form 5471 filers of CFCs to report certain types of income that was not previously taxed, under the Global Intangible Low-Taxed Income (GILTI) regulations, and of course, to pay tax on this income.

It should go without saying that Form 5471 is the single most complicated tax form for U.S. tax residents. And in a tax system considered by many to be the world’s most complex, that is really saying something. Indeed, even if you are used to filing an FBAR and 8938 each year, or even a Form 3520/3520A, Form 5471 is complex on a whole other level.

Therefore, if you are an officer, director or shareholder in a foreign corporation, it behooves you to seek professional help in filing this form, as the penalties for not filing a timely Form 5471, or incorrectly filing the form, are $10,000 for each accounting period for each foreign corporation, not to mention the penalties and interest that can accrue as a result of not paying any tax associated with the foreign corporation.

If you have ownership in a foreign corporation, please get in touch with us today to discuss your filing requirements for Form 5471. Or, if you are considering starting a company overseas, please reach out to us in order to get the planning and strategy around forming the foreign corporation correct. When it comes to the most complex tax form on the planet, one cannot afford to get things wrong.