Investing in foreign corporations or wholly owning one can sometimes be a great tax planning tool. However, the IRS has specific filing requirements for taxpayers who has an interest in foreign corporations. These are informational returns that do not create a tax liability for the filer, but ignoring them triggers severe penalties. Those who own whole or in part a foreign corporation must file a form 5471 with their annual income tax return.
Form 5471 is the equivalent of a corporate income tax return with no tax calculation. The form “is used by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations” to satisfy reporting requirements. A U.S person can be a domestic corporation, partnership, Estate, Trust or a real person who is a citizen or resident. A non-resident alien for whom an election to be treated as a resident was made is also subject to these filing requirements.
Filing Categories for Form 5471
The regulations currently classify filers of form 5471 in 5 different categories. If you fall in one of these categories you must file the form along with required schedules and attachments with your annual tax return. Here are the categories:
1 – You are a shareholder of a foreign corporation that is a section 965 specified 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 on which it was an SFC.
2 – You are an officer or director of a foreign corporation in which a U.S person acquired (buying is sufficient, stock need not be actually issued) at least 10% of voting stock or added at least 10% more to his/her share of ownership. These might take place in one or more transactions.
3 – You did any one of the following:
- Bought stock in a foreign corporation; when added to the previously owned stock you now own at least 10% of the voting stock of the corporation.
- You own stock in a foreign corporation, but during the tax year, you buy at least 10% more of the total stock in one or more transactions.
- You are considered as a shareholder of a foreign insurance corporation (i.e. you owned any stock for any period of time)
- You were a foreign person who became a U.S person while meeting the 10% ownership requirement
- You sold or otherwise disposed of enough stock to reduce your ownership in the corporation below the 10% threshold.
4 – You had control of a foreign corporation for an uninterrupted period of at least 30 days during the tax year. For category 4 meaning of control is:
- 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 that owns 50% stock in a company which controls a foreign corporation is also treated as controlling the foreign corporation.
5 – You own at least 10% share in a CFC for an uninterrupted period of 30 days or more and owned the stock on the last day of the tax year.
If you are required to file form 5471 for a tax year but don’t file, the IRS can impose a $10,000 for each year.
As stated before, filing 5471 does not mean you pay taxes on corporate income. The income is not to be reported until you actually receive it. There is a possibility your income will be considered repatriated even if you don’t receive it. That is the case where it can be considered a Subpart F income. This is a different topic I will discuss in another post.
