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What Is Form 5471?

What Is Form 5471?

Much to the taxpayer’s dismay, even if a foreign corporation does not have a permanent establishment in the United States and does not have any U.S. sourced income, the U.S. has taxing authority over certain foreign corporations with involvement by U.S. persons. If the foreign corporation has U.S. officers, directors, or shareholders who meet certain filing requirements, the U.S. officers, directors or shareholders are subject to U.S. income tax and must file Form 5471.

Form 5471 is an information return for certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations and includes mechanisms through which the US Government can tax foreign profits even before they are distributed as dividends, known as Subpart F.

Form 5471 is designed to serve multiple purposes and therefore is often very confusing and as it is not very common for U.S.-based taxpayers, it is a form that most experienced tax professionals are unfamiliar with.

Who Must File Form 5471

According to the Form 5471 Instructions, Form 5471 currently has four Categories of Filers based upon ownership and control of the corporation. All U.S. persons that meet the criteria for one or more of the categories must file a Form 5471. Unfortunately, to complicate things even further for the taxpayer, ownership is not limited to direct ownership and can instead be based above constructive ownership (i.e. attribution of ownership of other entities that are controlled by the taxpayer or certain family members). Interestingly enough, there is no constructive ownership in the case of a non-resident alien spouse.

Category 2 Filer

This includes a U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person (defined below) has acquired (in one or more transactions):

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

A U.S. 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.

Stock ownership requirement – For purposes of Category 2 and Category 3, the stock ownership threshold is met if a U.S. person owns:

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

U.S. person. For purposes of Category 2 and Category 3, a U.S. 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 defined in section 7701(a)(31).

Category 3 Filer

This category includes:

  • A U.S. person (defined above) who acquires stock in a foreign corporation which, when added to any stock owned on the date of acquisition, meets the 10% stock ownership requirement (described above) with respect to the foreign corporation;
  • A U.S. 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;
  • A person who is treated as a U.S. shareholder under section 953(c) with respect to the foreign corporation;
  • A person who becomes a U.S. person while meeting the 10% stock ownership requirement with respect to the foreign corporation; or
  • A U.S. person who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the stock ownership requirement.

Category 4 Filer

This includes a U.S. person who had control (defined below) of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of the foreign corporation.

U.S. person. For purposes of Category 4, a U.S. person is:

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

Control. A U.S. person has control of a foreign corporation if, at any time during that person’s tax year, it owns stock possessing:

  1. More than 50% of 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.

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.

Category 5 Filer

This includes a U.S. shareholder who owns stock in a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and who owned that stock on the last day of that year.

U.S. shareholder. For purposes of Category 5, a U.S. shareholder is a U.S. person who:

  1. Owns (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) 10% or more of the total combined voting power of all classes of voting stock of a CFC or
  2. Owns (either directly or indirectly, within the meaning of section 958(a)) any stock of a CFC (as defined in sections 953(c)(1)(B) and 957(b)) that is also a captive insurance company.

U.S. person. For purposes of Category 5, a U.S. 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 defined in section 7701(a)(31).

CFC. A CFC is a foreign corporation that has U.S. shareholders that own (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) on any day of the tax year of the 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.

Filing Requirements for Categories of Filers

The Filing Requirements for Categories of Filers is illustrated in the chart below:

The above chart identifies the schedules the filer is required to report based on their “Category of Filer”.

The required information may be as minimal as the identification of the US shareholder and the name and address of the foreign corporation — or as extensive as a balance sheet and income statement converted from multiple foreign currencies into US dollars and also converted into the GAAP method of accounting.

Unlike domestic corporations that report their taxes using Form 1120 or 1120s, Form 5471 is more extensive and requires foreign corporations to report and evaluate other important issues such as subpart F income, transfer pricing, and foreign tax credits. Please see our article on Subpart F Income to learn more about this area.

The amount of work required to prepare the Form 5471 can be extensive and very time consuming.

When determining if Form 5471 is required to be filed, it is very also important to remember that a foreign limited liability company (LLC) will be treated as a foreign corporation if an election has not been made to classify the entity as a foreign disregarded entity or a foreign partnership (which in itself would have to file a form similar to 5471, the Form 8865). Additionally, according to the IRS, a “foreign corporation” also includes an “International Business Company” (IBC) in which a U.S. person has partial ownership.

Form 5471 Penalties

It is very important to be aware of the Form 5471 filing requirements and make sure you properly assess whether each particular entity needs to file the form. The stakes are very high as failure to timely file Form 5471 can result in penalties imposed by the IRS of up to $10,000 (for each year) even though no tax may be due. This penalty can increase if the form is not filed after a failure to file notification has been issued by the IRS. The penalty then increases to $10,000 per month up to a maximum of $50,000. Additionally, an incomplete 5471 is deemed unfiled and the same penalties apply. Just one small mistake can cost you $10,000! Not only that, since the Form 5471 is part of your income tax return filing (such as the Form 1040 for a shareholder that is an individual), the filing of your individual return would also be deemed unfiled.

Form 5471 Due Date

The Form 5471 must be filed with and by the income tax return due date of the shareholder (including extensions). For most corporations, that would March 15th or the extended due date. For most individuals, that would be April 15th or the extended due date.

Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our clients. We are not only tax preparation and representation experts, but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.

Click the button below to request a Tax Preparation Quote today to get started with the preparation of your US tax return and Form 5471.


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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.

When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).

Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.



Updated: November 11, 2013

About Randall Brody

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12 thoughts on “What Is Form 5471?

  1. Form 5471: I own in various foreign corporations (engineering/manufacturing) 15% of the shares. In 2017 I became a US resident and I need to file 5471 category 3 for these corporation. If I have no ownership change, do I still have to file 5471 category 3 every year (2018 / 2019 / …)?

    1. Hi Chris, if you have no ownership change and it is not a controlled foreign corp (CFC), then you may only be required to file in subsequent years if there is an ownership change or becomes a CFC.

      Randall

  2. Form 5471: Once a Category 2 or 3 filer has filed, and there is no change, is Form 5471 still required every year thereafter?

  3. Hi, thanks for the article. I own 25% in a foreign company that has subsidiaries as well. My father owns more than 25%. He is not American and has no green card and lives abroad. Does his ownership count towards mine so i have to file as category 4? And if so, do i need to file individually for the subsidiaries as well (i have no direct ownership in those)? Thank you

    1. Hi Christian, a Category 4 or 5 filer does not have to file Form 5471 if the shareholder:

      1.Does not own a direct or indirect interest in the foreign corporation and
      2.Is required to file Form 5471 solely because of constructive ownership from a nonresident alien.

      A thorough review of your filing requirements under all categories for the parent and subsidiary companies (of which you have ownership as a result of your ownership of the parent company) should be made.

  4. I control 3 corporations outside of the US (in Costa Rica). Do I enter all of them on one single form-5471? Or must I file a form 5471 for each foreign corporate entity?

    And does it throw a red-flag to the IRS for having too many entities outside of the US?

    1. Hi Jack, a separate Form 5471 is required for each foreign corporation. I am not aware of any additional “red flags” as a result of owning multiple entities.

      Best regards,
      Randall

  5. If a person owns less than the 10 % like 9.9 % and be a director of the company, does that person still has to file a form 5471?

    1. The primary measure (but not the only factor) is stock ownership percentage – taking into consideration both direct and indirect ownership, such as constructive ownership. Each category would need to be closely evaluated to determine whether the taxpayer meets the category qualification.

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