Form 5471 is the most important information return that the IRS uses to collect information about foreign corporations with substantial US ownership. US taxpayers must file a Form 5471 with their US tax returns; failure to do so may result in the imposition of significant IRS penalties. In order to identify whether the IRS requires them to file Form 5471, US taxpayers must at the very least understand the following three fundamental Form 5471 concepts: “US Person”, “US Shareholder” and “Controlled Foreign Corporation” (“CFC”). This article introduces readers to these fundamental Form 5471 concepts.
Fundamental Form 5471 Concepts: US Person
The definition of “US Person” is crucial to understanding your Form 5471 filing requirements. Generally, the definition of a US person includes the following categories of taxpayers: US citizens, US tax residents, a domestic partnership, a domestic corporation, certain trusts and certain estates. It should be pointed out that tax-exempt entities can also be US persons.
In order for a trust to be a US Person, it must not be a foreign trust; in other words, it must satisfy the legal tests set forth in the Internal Revenue Code (“IRC”) §7701(a)(30). The first test is that a court within the United States is able to exercise primary jurisdiction over the trust’s administrative issues. The second test is that a US person has authority to make all important discretionary decisions which cannot be vetoed by a non-US person.
In order for an estate to be a US person, it must not be a foreign estate as defined in the IRC §7701(a)(31).
Fundamental Form 5471 Concepts: US Shareholder
The concept of US shareholder is also very important for understanding one’s Form 5471 obligations. The definition of a US shareholder was recently modified by the 2017 Tax Cuts and Jobs Act (“TCJA”).
A “US shareholder” is a US Person who owns either: (a) 10% or more of the total combined voting power of all classes of voting stock of a foreign corporation; or (b) 10% or more of the value of all the outstanding shares of a foreign corporation. The latter rule (10% ownership of the total value of shares) is applicable starting a tax year of a foreign corporation that begins after December 31, 2017.
It is important to point that “ownership” can be direct, indirect or constructive within the meaning of IRC §958(a) and §958(b).
Fundamental Form 5471 Concepts: Controlled Foreign Corporation
Owners of shares in a CFC face a far greater Form 5471 compliance burden than owners of shares in foreign corporations which are not CFCs. Hence, the concept of CFC is extremely important to identifying your Form 5471 obligations.
A CFC is a foreign corporation with US shareholders that own on any day of its tax year, more than 50% of either (1) the total combined voting power of all classes of its voting stock, or (2) the total value of its stock. Again, the “ownership” can be direct, indirect or constructive within the meaning of IRC §958(a) and §958(b).
The 2017 tax reform made profound changes to the definition of CFC. Many foreign corporations which were not CFCs under the pre-TCJA rules have been re-classified as CFCs starting tax year 2018.
Contact Sherayzen Law Office for Professional Help With Your Form 5471 Compliance
If you are a US person with an ownership interest in a foreign corporation of 10% or more, you may have extensive Form 5471 reporting obligations. Given the extreme complexity of the form and the high penalties associated with Form 5471 noncompliance, it is important secure the professional and experienced help of Sherayzen Law Office.