Attention US owners of foreign companies! If you haven’t already heard about it, brace yourself for IRS Form 5471 – one of the most complex and constantly changing tax forms that US-owned foreign companies may have to file. Don’t be fooled by thinking that filing requirements only apply to those with a large ownership percentage – even if you own a small stake, you may still be required to file.
This Form 5471 information return may not impact the amount of tax you pay. But be warned: it requires accurate information and disclosures. And if you fail to file, you can face stiff penalties of $10,000 and more. That’s right, this is not a drill!
We cannot stress enough the importance of seeking guidance from a tax professional who can help you navigate this labyrinthine form based on your unique circumstances.
In this article we give a general overview of this extremely complex tax form. Please consult a tax professional for guidance in your specific situation.
We cover the following:
- What Is IRS Form 5471?
- Who Must File IRS Form 5471?
- What Is A US Person?
- Who Is Considered A Shareholder Of A Foreign Corporation?
- Attribution Rules for Form 5471
- What Is A Foreign Corporation For US Tax Purposes?
- CFC – Controlled Foreign Corporation
- SFC – Section 965 Specified Foreign Corporation
- Different Categories Of 5471 Filers
- When To File Form 5471?
- 5471 Penalties For Failure To File
- Multiple Filers For The Same Foreign Corporation
- Get Help With Filing Form 5471 For A US-Owned Foreign Business
Let’s get started.
What Is IRS Form 5471?
Form 5471 is an “Information Return of US Persons with Respect to Certain Foreign Corporations” (its official name). The purpose is not taxation but disclosing information, hence “information return”. The US government wants to know who owns what overseas to prevent US taxpayers from hiding assets.
The form itself is complex with different categories of filers and a long list of Schedules. To make matters worse, the form keeps changing and getting even more complicated. The IRS updated Form 5471 again for the 2022 tax year.
Who Must File IRS Form 5471?
Any “US person” that is an officer, director, or shareholder in certain foreign corporations must generally file Form 5471. Many US taxpayers think that this wouldn’t apply to them. However, the filing requirement is broader than you may think.
In general, any US person that has at least 10% ownership in a foreign corporation must file Form 5471. Read on to see how the IRS defines 10% ownership – it’s not only what you own directly.
And just because the foreign country may not call your foreign business a corporation, the IRS still might.
As you can see, it can already be a challenge to determine who must file.
Let’s look at important definitions for Form 5471.
What Is A US Person?
A US person is not only a US citizen, green card holder, or resident. It also includes US corporations, partnerships, trusts, and estates. Even a US tax-exempt entity may have to file.
Also, expats claiming treaty benefits on Form 8833 remain US persons for the purpose of Form 5471.
Who Is Considered A Shareholder Of A Foreign Corporation?
Any US person that owns directly, indirectly, or constructively 10% or more of the voting power or the value of the shares of a foreign corporation is a shareholder for the purpose of Form 5471. It’s important to understand what “indirectly” and “constructively” mean.
The IRS considers the following parties to be shareholders of a foreign corporation:
- Individuals who own shares in the foreign corporation.
- Partnerships and LLCs that own shares in the foreign corporation.
- Corporations that own shares in the foreign corporation.
- Estates and trusts that own shares in the foreign corporation.
- Nominees who hold shares in the foreign corporation on behalf of others.
- Beneficial owners of shares in the foreign corporation who are not listed on the corporation’s books but who have the right to receive dividends or other distributions from the corporation.
- Entities that hold shares in the foreign corporation as part of a tax shelter or other complex ownership structure, such as a hedge fund or private equity fund.
- Entities that hold shares in the foreign corporation as part of a partnership, LLC, or other pass-through entity that is itself a shareholder of the foreign corporation.
- Any other entity or individual who holds shares in the foreign corporation, regardless of the form or structure of ownership.
Also, it is important to consider so-called “attribution rules” when determining ownership.
Attribution Rules for Form 5471
Attribution rules help determine who is considered a shareholder of the foreign corporation for tax purposes. Here is a list of attribution rules for foreign corporations according to the IRS:
Ownership By Individuals
Shares owned by an individual are attributed to their spouse, children, grandchildren, and parents. Ownership by a partnership or LLC is attributed to its partners or members.
Ownership By Entities
Shares owned by a corporation are attributed to any individual who owns more than 50% of the corporation’s stock. Ownership by a partnership or LLC is attributed to any partner or member who owns more than 50% of the entity.
Controlled Foreign Corporations
The IRS has rules for determining who is considered a “United States shareholder” of a Controlled Foreign Corporation (CFC). A United States shareholder generally includes any U.S. person who owns 10% or more of the total combined voting power of all classes of stock of a CFC. We explain in a moment what a CFC is.
Family Attribution
Shares owned by one family member can be attributed to another family member if certain conditions are met. For example, shares owned by a parent can be attributed to their child if the parent and child own more than 50% of the stock of a foreign corporation between them.
Partnership Attribution
Shares owned by a partnership can be attributed to its partners if the partnership owns 50% or more of the stock of a foreign corporation.
Trust Attribution
Shares owned by a trust can be attributed to its beneficiaries if certain conditions are met. For example, shares owned by a foreign trust can be attributed to its U.S. beneficiaries if the U.S. beneficiaries have the right to receive distributions from the trust.
So, even if you own less than 10% directly, with the attribution rules your ownership can exceed the 10% threshold.
What Is A Foreign Corporation For US Tax Purposes?
The US government provides a list of business entities formed in foreign jurisdictions that it treats as foreign corporations for US tax purposes. But it doesn’t stop there. Even if your business is not on that list, if it is classified as a “per se corporation”, it is considered a corporation for US tax purposes. Therefore, it would have a 5471 filing requirement if it qualifies under any of the category of filers.
You can already see why this is one of the most complicated IRS forms. For help with filing this form, or determining if you have to file, please schedule a consultation with our expat tax experts.
Before we describe the different categories of filers, there are two more important definitions regarding 5471:
- CFC – Controlled Foreign Corporation
- SFC – Section 965 Specified Foreign Corporation
CFC – Controlled Foreign Corporation
The IRS defines a Controlled Foreign Corporation (CFC) as a foreign corporation in which US shareholders combined own more than 50%, with each owning at least 10%, on any day during the year.
Just as we explained earlier for shareholders, the 50% can be the combined voting power or the total value of shares. Again, indirect and constructive ownership also count, so be aware of the attribution rules.
SFC – Section 965 Specified Foreign Corporation
A Section 965 Specified Foreign Corporation (SFC) is either a CFC or a foreign corporation that has at least one US shareholder that is a corporation.
If the US shareholders don’t own more than 50% of the vote or value, the foreign corporation would not be a CFC but can still be a SFC. Form 5471 Category 1 filers applies to SFCs.
Different Categories Of 5471 Filers
The IRS defines five different the categories of filers for Form 5417. The category of filer determines which sections of the tax form and which schedules must be completed.
We give an overview of the 5471 categories below. The 5471 Instructions go into detail about each category and the schedules required under each category.
Category 1 – US Shareholder (SFC)
A Category 1 filer is a US shareholder of a SFC (see definitions above) at any time during the tax year of the SFC and who owned that stock on the last day in the year it was an SFC.
Category 2 – Officer Or Director
A US person that is an officer or director of a foreign corporation in which a US person acquires 10% ownership. (The officer or director can own less than 10%.)
Category 3 – Additional Acquisition Of Stock
Generally, a US person that gains 10% stock ownership when they acquire stock or additional stock. Also, a US person that disposes of stock to reduce their ownership below the 10% threshold.
This category also includes a non-US person with at least 10% ownership who then becomes a US person in that year. If you plan to become a US resident, don’t forget about pre-immigration tax planning.
Category 4 – Control Test
A US person who controls a foreign corporation for a period of 30 days or more during the tax year, meaning they own stock with more than 50% of the total combined voting power or of the total value of shares.
Category 5 – CFC
A US shareholder of a CFC (see definitions above) at any time during the tax year of the CFC and who owned that stock on the last day in the year it was an CFC.
As mentioned earlier, each category has specific disclosure requirements.
When To File Form 5471?
Form 5471 is filed together with your individual or business tax return. Therefore, its due date is the same as for the individual or business tax return, including extensions.
For a full list of all US tax deadlines for individuals and businesses, check out our tax filing calendar.
5471 Penalties For Failure To File
The IRS imposes a $10,000 penalty for failing to file Form 5471 on time, for each annual accounting period of each foreign corporation. The IRS can also assess a penalty if the Form 5471 is inaccurate or missing information.
In addition, if the form is not filed within 90 days after the IRS has mailed a notice, it can charge an additional $10,000 (per foreign corporation) for each 30-day period. The maximum additional penalty is limited to $50,000 for each failure.
With these steep penalties, don’t take the risk of not filing because you’re not sure how the requirements apply to you. Talk to a tax advisor.
Multiple Filers For The Same Foreign Corporation
Sometimes, multiple US persons meet the filing requirements for the same foreign corporation. How should they file?
Multiple filers with different ownership interests
If there are multiple filers for the same foreign corporation who have different ownership interests, each filer should complete their own section of Form 5471 that corresponds to their ownership interest.
For example, if one filer owns 30% of the foreign corporation’s voting stock and another filer owns 20%, each filer should complete their own section of the form that corresponds to their respective ownership percentages.
Joint filers with the same ownership interest
If there are multiple filers for the same foreign corporation who have the same ownership interest, they may choose to file a single Form 5471 jointly. In this case, all filers should provide their personal identifying information on the form, and the section of the form that corresponds to their ownership interest should be completed jointly.
This means that one person can file Form 5471 and associated schedules on behalf of another person with the same filing requirement.
Things to be aware of:
- If you are filing on behalf of someone else, make sure you fill out the relevant section for that.
- If someone else files on your behalf, you may also need to include a statement on your tax return.
Get Help With Filing Form 5471 For A US-Owned Foreign Business
If you made it this far through the article, you understand how complex this tax form is. Even determining who has to file can be complicated, due to the attribution rules and constructive ownership.
The complexity, coupled with high penalties, make this an anxiety-inducing form for US owners of foreign businesses. We do not recommend tackling this form on your own, even if you are willing to make it through the 43 pages of instructions.
Schedule a consultation with our experienced expat tax advisors.
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