IRS Form 5471 – Information Return of U.S. Persons With Respect to Certain Foreign Corporations

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IRS Form 5471 – Information Return of U.S. Persons With Respect to Certain Foreign Corporations

Form 5471 is used by U.S. persons involved in foreign corporations to satisfy federal reporting requirements under Internal Revenue Code (IRC) sections 6038 and 6046. The IRS has delineated five categories of persons required to file Form 5471. A person that could be classified in multiple categories with respect to her involvement in a single foreign corporation is not required to file Form 5471 more than once; however, a single person must file Form 5471 for each foreign corporation that she is involved in. A joint Form 5471 may be filed when one or more persons are required to file information regarding the same foreign corporation for the same period. Each category has its own requirements of what extra documents must be filed along with Form 5471. In general, U.S. persons that hold stock in a foreign corporation, or that serve as officers or directors in a foreign corporation in which U.S. persons hold stock, may be required to file Form 5471 with their annual income tax returns. Exceptions to this filing requirement arise in situations of constructive ownership, or an election to be treated as a domestic corporation.

Failure to timely file Form 5471 can result in significant cash penalties ($10,000 for each annual accounting period or reportable transaction, plus an additional penalty of up to $50,000 for continued failure to file even after notice of deficiency from the IRS) and revocation of a portion of foreign tax credits available under IRC sections 901, 902, and 960.

Categories of Filers:

  • Category 1 – Shareholders of SFCs: U.S. shareholders owning at least 10% of the total combined voting power of all classes of stock in a specified foreign corporation (SFC). SFCs include (1) controlled foreign corporations (CFC), which are foreign corporations with U.S. shareholders that own at least 50% of the total combined voting power of all classes of its voting stock, or the total value of the stock of the corporation, and (2) foreign corporations whose domestic corporations have a U.S. shareholder. A passive foreign investment company that is not classified as a CFC will not be considered an SFC.
  • Category 2 – Officers and Directors: S. citizens or residents who are officers or directors of foreign corporations in which a U.S. person has acquired at least (1) 10% of the total value of the corporation’s stock, (2) 10% of the total combined voting power of all classes of stock with voting rights, or (3) an additional 10%, in value or voting power, of the outstanding stock of the foreign corporation. A U.S. person can be a citizen or resident, a domestic partnership, a domestic corporation, or an estate or trust.
  • Category 3 – U.S. Persons Holding 10% of Stock: U.S. persons holding at least (1) 10% of the total value of the corporation’s stock, or (2) 10% of the total combined voting power of all classes of stock with voting rights. This 10% ownership requirement is met whether the 10% interest is acquired through multiple transactions or a single transaction. Relinquishing stock in order to fall below the 10% threshold will not remove a U.S. person from Category 3. A foreign person who holds this 10% interest in a foreign corporation and then becomes a U.S. person is included in Category 3.
  • Category 4 – Controllers of a Foreign Corporation: U.S. persons who had control of a foreign corporation during the annual accounting period of the foreign corporation. A U.S. person meets the control requirement when at any point during the person’s tax year, the person owns stock in the foreign corporation possessing more than 50% of the total value of shares, or more than 50% of the total combined voting power of all classes of voting stock. A person who controls a corporation that, in turn, controls another corporation in the same manner is deemed to control the other corporation.
  • Category 5 – Shareholders of CFCs: U.S. shareholders owning stock in a CFC. U.S. shareholders are U.S. persons holding at least 10% of (1) the total combined voting power of all classes of the CFC’s voting stock, or (2) the total combined voting power or value of shares of all classes of the CFC’s stock. U.S. shareholders also include U.S. persons that hold any stock of a CFC that also is a captive insurance company.

Exceptions from filing:

  • Election as a domestic corporation: shareholders of a foreign insurance company that has elected (under section 953(d)) to be treated as a domestic corporation and has filed a U.S. income tax return for its tax year under that provision do not have to file the additional schedules of information required under Form 5471.
  • Constructive ownership:
    • Category 1, 3, 4, and 5 filers are treated as constructive owners exempt from filing Form 5471 when:
      • They do not own a direct interest in the foreign corporation,
      • They are required to furnish the information only due to constructive ownership from another U.S. person (as determined under CFR section 1.958-2, 1.6038-2(c), or 1.6046-1(i)), and
      • The U.S. person whose direct ownership causes the shareholders to be an indirect owner of interest in the foreign corporation files Form 5471.
    • Category 2 officers and directors are exempt from filing Form 5471 when:
      • Immediately after a reportable stock acquisition, three or fewer U.S. persons own 95% or more in value of the outstanding stock of the foreign corporation and the U.S. person making the acquisition files a return for the acquisition as a Category 3 filer, or
      • The U.S. person(s) for which the Category 2 filer is required to file Form 5471 does not directly own an interest in the foreign corporation but is required to furnish the information solely because of constructive stock ownership from a U.S. person and the person from whom the stock ownership is attributed furnishes all of the required information.
    • Category 4 and 5 filers are exempt from filing Form 5471 when:
      • They do not own a direct or indirect interest in the foreign corporation, and
      • They are required to file Form 5471 solely because of constructive ownership from a nonresident alien.
    • Category 1 and 5 filers are exempt from filing Form 5471 when no U.S. shareholder (including such U.S. person) owns, within the meaning of section 958(a), stock in the foreign corporation, and the foreign corporation is an SFC or CFC solely because one or more U.S. persons is considered to own the stock of the foreign corporation owned by a foreign person under IRC section 318(a)(3).