An Introduction to Form 5471
An Introduction to Form 5471 - Information Return of U.S. Persons With Respect to Certain Foreign Corporations
Purpose of Form
Form 5471 is used to satisfy the reporting requirements of Internal Revenue Code (“IRC”) §§ 6038 (information reporting with respect to certain foreign corporations and partnerships) and 6046 (returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock). Likewise, Form 5471 is used to report amounts related to IRC § 965 (treatment of deferred foreign income upon transition to participation exemption system of taxation). Certain U.S. persons who are officers, directors, or shareholders in certain foreign corporations are required to file the form.
Who Must File
Generally, all U.S. persons that fit within a specific Category of Filers (listed below) must file Form 5471. It is important to note that depending on which category or categories that the U.S. person satisfies, there are different schedules, statements, and other information that must be completed on the Form 5471. As mentioned, if the filer is described in more than one filing category, the filer must complete all items that apply, but information need not be duplicated. Lastly, if the filer is an officer, director, or shareholder of multiple foreign corporations, the U.S. person must file a separate Form 5471 for each applicable foreign corporation.
Categories of Filers
Category 1 Filers
Generally, Category 1 Filers include U.S. shareholders of a foreign corporation that are “specified foreign corporations” at any time during the tax year of the foreign corporation and who owned stock of the foreign corporation on the last day of the tax year.
For purposes of Category 1 Filers, a “U.S. shareholder” is defined as a U.S. person who directly, indirectly, or constructively owns 10% or more of the total combined voting power of the specified foreign corporation’s voting stock. However, the IRS broadened the Category 1 Filer requirement for tax years of foreign corporations beginning after December 31, 2017. For such tax years, U.S. shareholders include those who own 10% or more of the total combined voting power or value of shares of all classes of stock of a specified foreign corporation.
Under IRC § 7701(a)(3), a “U.S. Person” includes:
- 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 IRC § 7701(a)(31).
A “Specified Foreign Corporation” is defined in IRC § 965 and includes:
- A CFC, or
- Any foreign corporation with respect to which one or more domestic corporations is a U.S. shareholder.
A “CFC” is defined as a foreign corporation that has U.S. shareholders that directly, indirectly, or constructively own 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 on any day of the tax year of such foreign corporation.
Category 2 Filers
Category 2 Filers include U.S. citizens or residents who are officers or directors of foreign corporations in which a U.S. person has acquired:
- Stock meeting the 10% stock ownership requirement 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.
Under Treasury Regulation § 1.6046-1, a U.S. person has acquired stock in a foreign corporation when that person has an unqualified right to receive the stock.
The 10% stock ownership requirement is met if a U.S. person owns 10% or more of the total value of the foreign corporation’s stock or the total combined voting power of all classes of stock with voting rights.
Category 3 Filers
Category 3 Filers include:
- A U.S. person who acquires stock in a foreign corporation which meets the 10% stock ownership requirement with respect to the foreign corporation. If the U.S. person already owned stock in the foreign corporation, the newly acquired stock shall be added to the already owned stock in determining the 10% stock ownership requirement;
- A U.S. person who acquires stock which, without regard to stock already owned, meets the 10% stock ownership requirement;
- A person who is treated as a U.S. shareholder with respect to the foreign corporation for certain captive insurance companies as outlined in IRC § 953(c);
- A person who becomes a U.S. person while meeting the 10% stock ownership requirement; or
- A U.S. person who disposes of enough stock in the foreign corporation to reduce his or her interest to less than the 10% stock ownership requirement.
Category 4 Filers
Category 4 Filers includes U.S. persons who had control of a foreign corporation during the annual accounting period of the foreign corporation. A U.S. person has control of a foreign corporation if, at any time during that U.S. person’s tax year, such U.S. person owns stock possessing more than 50% of the total combined voting power or total value of all classes of stock of the foreign corporation. If the U.S. person in control of the foreign corporation effectively owns more than 50% of the combined voting power or value of another foreign corporation, then the U.S. person shall also be treated as being in control of such other corporation. Accordingly, the U.S. person must file a separate Form 5471 for the other corporation.
Category 5 Filers
Category 5 Filers include U.S. shareholders who own stock in a foreign corporation that is a CFC (defined above) at any time during the tax year of the foreign corporation and who owned such stock on the last day of the tax year.
Exceptions from Filing
Multiple filers of the same information
If a U.S. person and one or more other persons are required to report the same information related to the same foreign corporation for the same tax year, all such U.S. persons may file a joint information return that contains the required information. The joint information return must be filed with any one of the U.S. persons’ tax return.
Shareholders of a foreign insurance company that has elected to be treated as a domestic corporation and has filed a U.S. income tax return for the tax year in question are not required to file a Form 5471.
Certain constructive owners
- Category 1-5 Filers (“shareholder”) do not have to file Form 5471 if:
- The shareholder does not own a direct interest in the foreign corporation;
- The shareholder is required to report such information solely because of constructive ownership from another U.S. person; and
- The U.S. person through which the shareholder constructively owns an interest in the foreign corporation filed Form 5471 to report all of the required information.
- A Category 2 Filer does not have to file Form 5471 if:
- 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 report the information solely because of constructive stock ownership from a U.S. person and the person from who the stock ownership is attributed reported all of the required information.
- A Category 1, 4, or 5 Filer does not have to file Form 5471 if the shareholder does not own a direct or indirect interest in the foreign corporation and is required to file Form 5471 solely because of constructive ownership from a nonresident alien .
- A Category 1 or 5 Filer does not have to file Form 5471 if no U.S. shareholder owns stock in the foreign corporation on the last day in the year in which the foreign corporation was a specified foreign corporation or a CFC and the corporation is a specified foreign corporation or CFC because at least one U.S. person is considered to own the stock of the foreign corporation owned by a foreign person.
- A Category 1 or 5 Filer also does not have to file Form 5471 if:
- The filer is a U.S. shareholder that only owns stock in the foreign corporation;
- The filer is not related to the foreign corporation under IRC § 958(d); and
- The foreign corporation is a foreign-controlled corporation.
Failure to File
Under IRC §§ 6038 and 6046, there shall be a $10,000 penalty imposed for each failure to file the required information. Moreover, if the information is not reported within 90 days after the IRS has mailed a notice of the failure to file, an additional $10,000 penalty (per foreign corporation) shall apply for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. However, the total maximum penalty is limited to $60,000 for each failure.
Under IRC § 6662(j), penalties may be imposed for undisclosed foreign financial asset understatements. In the case of any portion of an underpayment of tax which is attributable to an undisclosed foreign financial asset understatement, the penalty shall be 40% of the underpayment of tax. However, no penalty shall be imposed with respect to any portion of an underpayment if the taxpayer can show that the failure to comply was due to reasonable cause and the taxpayer acted in good faith.
Criminal penalties may apply to U.S. and foreign taxpayers who fail to file a return (IRC § 7203) or file a false or fraudulent return (IRC §§ 7206 and 7207).
If you have been subject to a failure to file or accuracy-related penalties or intentionally omitted your foreign assets from previously filed returns, contact a tax attorney immediately. The Wilson Firm has handled a number of the cases and has the expertise to assist you in navigating such a complicated path.