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What is a form 5471 and who needs to file one?

Form 5471 is ‘Information Return of US Persons with Respect to Certain Foreign Corporations.’

You need to file form 5471 if you are a US Person, you own an interest (directly, indirectly or constructively) in a foreign corporation and you fall within one of the 5 different categories of filers.

A US Person is someone who is a US resident.  You are a US resident if you are a citizen, hold a green card or you are a substantial presence test alien. [See blog – Am I a US resident]

Category 1

If you are a US shareholder of a specified section 965 foreign corporation at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year in which it was a specified foreign corporation, taking into account the regulations under section 965, you need to file form 5471.

What is a US Shareholder

A US shareholder is a US person who owns (directly, indirectly, or constructively) 10% or more of the combined voting power of all classes of voting stock of a 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 of shares of all classes of stock of an SFC.

What is a Section 965 specified foreign corporation

A specified foreign corporation is:

  1. A Controlled foreign corporation (CFC).  A CFC is a foreign corporation that has US shareholders that own (directly, indirectly, or constructively) on any day of the tax year of a 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.
  2. A foreign corporation with respect to which one or more domestic corporations is a US shareholder.

Category 2

You are a Category 2 filer if have acquired certain stock in a calendar year.

Category 2 includes a US Citizen or resident who is an offer or director of a foreign corporation which a U.S. Person has acquired (in one or more transactions):

  1. Stock which meets the 10% stock ownership requirement, with respect to a foreign corporation;
  2. An additional 10% or more (in value or voting power) of the outstanding stock of the foreign corporation.

A US 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.

10% ownership requirement

For the purposes of Category 2 and Category 3, the stock ownership threshold is met if a US person owns:

  1. 10% or more of the total value of the foreign corporation’ stock; or
  2. 10% or more of the total combined voting powers of all classes of stock with voting rights.

For the purposes of Category 2 and Category 3, a US 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.

Category 3

This category includes:

  1. a US Person who acquires stock in a foreign corporation which, when added to any stock owned by the date of acquisition , meets the 10% stock ownership with respect to the foreign corporation;
  2. A US 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;
  3. A person who becomes a US Person whole meeting the 10% stock ownership requirement with respect to the foreign corporation; or
  4. A US Person who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than 10% stock ownership requirement.

Category 4

This category includes a US Person who had control of a foreign corporation during the annual accounting period of the foreign corporation.

For the purposes of category 4 a US Person includes:

  1. A citizen or resident of the United States;
  2. A nonresident alien for whom an election is in effect under section 6013(h) relating to non-resident 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;
  3. A domestic partnership;
  4. A domestic corporation;
  5. An estate or trust that is not a foreign estate or trust as defined in section 7701(a)(31).

A US Person has control a foreign corporation if, at any time during that persons tax year, it owns stock possessing:

  1. more than 50% o the total combined voting power of all classes of stock of the foreign corporation entitled to vote, or
  2. More than 50% of the total value of shares of all classes of stock of the foreign corporation.

Category 5

This category includes a US 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.

For the purposes of Category 5, a US Shareholder is a US Person who:

  1. owns (directly, indirectly, or constructively) 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
  2. owns (directly or indirectly) any stock of a CFC that is also a captive insurance company.

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.

A US Person for the purposes of Category 5 is:

  1. a citizen or resident of the United States;
  2. A domestic partnership;
  3. A domestic corporation;
  4. An estate or trust that is not a foreign estate or trust as defined in section 7701(a)(31).
  5. and you own an interest in a foreign corporation you may need to file for 5471.

A CFC is a foreign corporation that has US Shareholders that own (directly, indirectly, or constructively) on any day in the tax year of a foreign corporation, more than 50% of:

  1. the total combined voting power of all classes of its voting stock, or
  2. the total value of the stock of the corporation.

Penalties

Form 5471 and Schedule M

A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the information required by section 6038(a) within the time prescribed.  If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the US Person, an additional $10,000 penalty is charged for each 30 day period has expired.  The additional penalty is limited to a maximum penalty of $50,000.

Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit under section 901, 902 and 960.  If the failure continues 90 days or more after the date the IRS mails notice of the failure to the US person, an additional 5% reduction will be made for each 3 month period, or a fraction thereof, during which the failure continues.

Form 5471 and Schedule O

Any person who fails to file or report all of the information requested by section 6046 is subject to a $10,000 penalty for each such failure for each reportable transaction.  If the failure continues for more than 90 days after the date the IRS mails the notice of the failure, an additional $10,000 penalty will apply for each 30 day period or fraction thereof.  The additional penalty is limited to a maximum penalty of $50,000.