U.S. citizens or residents who are officers, directors, or shareholders in certain foreign corporations may be required to file Form 5471. While this seems like a straightforward form, Form 5471 is very important and presents a lot of information to the IRS that can indicate other penalties or tax.
Those who are required to file are split into 5 categories. Each taxpayer should carefully consider which category is applicable to them because the category of the taxpayer determines which schedules, statements, and other information must be completed.
- Category 1 filers – U.S. shareholders of a Specified Foreign Corporation (“SFC”). An SFC is any foreign corporation where one or more domestic corporations is a U.S. shareholder or where U.S. shareholders own more than 50% of the stock of the corporation. Category 1 filers are divided into three subcategories depending on the amount of their stock ownership and whether it is owned directly, indirectly, or constructively.
- Category 2 filers – Officers or directors of a foreign corporation where any U.S. person (not necessarily the officer or director) has acquired stock and now owns 10% or more of the foreign corporation or has acquired an additional 10% or more of the foreign corporation.
- Category 3 filers – U.S. persons who acquire stock in a foreign corporation and now own 10% or more of the stock or dispose of stock in a foreign corporation to reduce their interest to less than 10%. It also applies when a shareholder becomes a U.S. person while owning 10% or more of the stock of the corporation, or when at least 10% of stock is acquired.
- Category 4 filers – U.S. persons who had control of a foreign corporation during the annual accounting period of the foreign corporation. A person who controls a corporation which controls another corporation is treated as being in control of both.
- Category 5 filers – U.S. shareholders of a Controlled Foreign Corporation (“CFC”). A CFC is a foreign corporation that has U.S. shareholders that own more than 50% of the stock of the corporation. Category 5 filers are divided into three subcategories depending on the amount of their stock ownership and whether it is owned directly, indirectly, or constructively. CFCs are also the type of foreign corporation that give rise to Subpart F analysis and things such as GILTI.
Categories 1 and 5 relate to “U.S. shareholders.” For these categories, a U.S. shareholder is a U.S. person who owns (directly, indirectly, or constructively) 10% or more of either the total voting power or value of the stock of a foreign corporation. A “U.S. person” includes an individual that is a citizen, green card holder, or meets substantial presence. Therefore, if a U.S. person doesn’t own at least 10% they are not counted towards this control test.
Control is defined to be greater than 50% of either vote or value. Additionally, in some situations as mentioned above, the IRS considers stock owned indirectly or constructively as owned by the taxpayer. This means that a taxpayer not only needs to consider direct ownership but also ownership by family members or other businesses.
If a taxpayer is required to file Form 5471 and does not, it can be an expensive mistake. There is a potential $10,000 penalty for each failure to file. Additionally, if the IRS has sent a notice of the failure to file, there may be additional penalties if the notice is ignored up to $60,000 per year per form. If a U.S. person has any ownership in or is an officer or director of a foreign corporation, a full analysis should be completed to determine if they are required to file Form 5471.