What is Form 5471?
Form 5471 is an information return for certain U.S. citizens and residents who are officers, directors, or shareholders of certain foreign corporations. This form is officially called the Information Return of U.S. Persons with Respect to Certain Foreign Corporations. It includes mechanisms through which the US Government can tax foreign profits even before they are distributed as dividends, known as Subpart F.
Form 5471 has been in existence for many years. However, it has gained significantly more importance after the passage of the Foreign Account Tax Compliance Act (FATCA) in 2010 and the Tax Cut and Jobs Act of 2017.
On its face, Form 5471 is similar to a U.S. corporate income tax return Form 1120, but it is for foreign corporations and requires reporting of much of the same information, such as an income statement and balance sheet. This Form contains important disclosure information and, in many cases, includes relevant information to determine the current U.S. tax liability of the U.S. shareholder of the foreign corporation.
Who Must File Form 5471
Form 5471 is filed as part of the U.S. person’s tax return (Form 1040, 1065, 1120, etc.) and is due on the date the income tax return is due, including any extensions.
Form 5471 must be filed by all U.S. persons who fall into any of the five categories discussed below. The current five Categories of Filers are based upon ownership and control of the corporation. All U.S. persons that meet the criteria for one or more of the categories that are discussed below, must file Form 5471.
For reference, and so that you understand how these categories may subject you to file form 5471, you should know that for purposes of this form, ownership is not limited to direct ownership and can instead be based on constructive ownership for example attribution of ownership of other entities that the taxpayer or certain family members control. However, you should also know that there is no constructive ownership in the case of a non-resident alien spouse.
The filing requirements are assigned to the following five categories of filers:
Category 1 Filer
This includes a U.S. shareholder of a foreign corporation that is a section 965 specified foreign corporation (SFC), defined below, 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, taking into account the regulations under section 965.
Section 965 specified foreign corporation (SFC). For purposes of Category 1 filers, an SFC (as defined in section 965) is:
- A CFC: 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 The total combined voting power of all classes of its voting stock, or The total value of the stock of the corporation.
- Any foreign corporation with respect to which one or more domestic corporations is a U.S. shareholder.
- However, if a passive foreign investment company (as defined in section 1297) with respect to the shareholder is not a CFC, then such a corporation is not a section 965 SFC.
U.S. Shareholder: For purposes of Category 1 filers, a U.S. shareholder is a U.S. person who owns directly, indirectly, or constructively, 10% or more of the total combined voting power of all classes of the voting stock of a section 965 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 or value of shares of all classes of stock of a section 965 SFC.
A U.S. person is:
- A citizen or resident of the United States
- A domestic partnership,
- A domestic corporation, and
- An estate or trust that is not a foreign estate or trust as defined in section 7701(a)(31).
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):
- Stock that meets the 10% stock ownership requirement (described below) with respect to the foreign corporation or
- 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:
- 10% or more of the total value of the foreign corporation’s stock or
- 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:
- A citizen or resident of the United States,
- A domestic partnership,
- A domestic corporation, and
- An estate or trust that is not a foreign estate or trust is defined in section 7701(a)(31).
Category 3 Filer
This category includes:
- A U.S. person 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 that, 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 a foreign corporation to reduce his or her interest to less than the 10% stock ownership requirement.
Category 4 Filer
This category includes a U.S. person who had control, defined below, of a foreign corporation during the annual accounting period of the foreign corporation.
U.S. person is:
For purposes of Category 4, a U.S. person is:
- A citizen or resident of the United States;
- A nonresident alien for whom an election is in effect under section 6013(g) to be treated as a resident of the United States;
- 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;
- A domestic partnership;
- A domestic corporation; and
- An estate or trust that is not a foreign estate or trust as 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:
- 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 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 another corporation.
Category 5 Filer
These categories include a U.S. 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. However, see Certain Category 1 and Category 5 Filers, later, which may apply.
U.S. shareholder. For purposes of Category 5 filers, a U.S. shareholder is a U.S. person who 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, 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
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 is:
For purposes of Category 5 filers, a U.S. person is:
- A citizen or resident of the United States,
- A domestic partnership,
- A domestic corporation, and
- An estate or trust that is not a foreign estate or trust as 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:
- The total combined voting power of all classes of its voting stock, or
- The total value of the stock of the corporation.
Fines & Penalties
Failure to file (or incomplete filing) of Form 5471 is subject to significant penalties as follows:
- A $10,000 penalty is imposed for each annual accounting period of the foreign corporation for failure to furnish the required information
- The penalties can go up to a maximum of $60,000 if filing requirements are not complied with within 90 days of such notice from the IRS
- Additionally, the IRS may reduce the foreign taxes available to be claimed as a foreign tax credit.
- Please be aware that there is no exemption from filing for U.S. taxpayers living abroad.
Solution: find out whether you are required to file this form or not. Attorney Sabalier will review your case and advise you on the course of action that will serve your interests best. If you believe you are required to file this form and have been out of compliance. Get in contact with Tax Attorney Alexandra Sabalier to discuss your remediation options via an online consultation.
