US Tax Guide for Expats (2019): Form 5471
Form 5471, Information Return of US Persons With Respect To Certain Foreign Corporations
Filing of Form 5471 is required by certain United States citizens and residents who become an officer or director of certain foreign corporations, and certain United States persons (as defined for FBAR reporting) who are shareholders in certain foreign corporations.* The form is used to satisfy the requirements of multiple sections of the Internal Revenue Code - primarily Section 6038, Section 6046 and Section 957. Since these sections have conflicting rules and definitions, this form is particularly challenging. The requirements are applied to separate categories of filers, each category specifying separate, but sometimes overlapping conditions. There are five categories of filers, numbered 1 through 5. Category 1 requirements were repealed in 2004, but reinstated for a different purpose for the 2018 tax year. Here are the Instructions to Form 5471. If you're having trouble sleeping, give this a try. You'll be asleep in about five seconds.
* The foreign corporation may or may not be called a corporation, but this form is required if the foreign entity is considered a corporation for US federal tax purposes. Generally, foreign entities are classified as corporations if all members have limited liability [See Reg. 301.7701-3(b)(2)(B)].
Category 1 Filer
This category is for a "US shareholder" of a foreign corporation that is a section 965 specified corporation (SFC) at any time during the year of the foreign corporation, and who owned that stock on the last day of that year.
A US shareholder isn't just any US person who owns stock. It's a US person (defined under Category 5) who owns (directly or indirectly under the attribution rules) 10% or more of the total combined voting power or value of all classes of voting stock of an SFC.
An SFC is either a controlled foreign corporation (defined under Category 5), or any foreign corporation with respect to which one or more domestic corporations is a US shareholder.
Category 2 Filer
If you are a US citizen or resident, and you become an officer or director of a foreign corporation in which a United States person meets the stock ownership described under Category 3 Filer, you are required to file Form 5471 under Category 2. You need not have any stock ownership yourself in the corporation to meet this requirement. The requirement applies only in the year you become an officer or director, or the stock ownership is met, so you are only required to file once.
Category 3 Filer
This is a United States person who acquires stock in a foreign corporation which, either: a) when added to any stock owned on the date of acquisition, meets the 10% stock ownership requirement (described below) with respect to the foreign corporation, b) 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, c) becomes a United States person while meeting the 10% stock ownership requirement with respect to the foreign corporation, or d) disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the stock ownership requirement.
Stock Ownership Requirement: For purposes of Category 2 and Category 3, the stock ownership threshold is met if a United States 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.
Now, ownership in tax land might be different than your concept, because rules for attribution, or indirect ownership, are always applied in the Internal Revenue Code. However, the concept for one Code section is not necessarily the same as for another. Attribution is defined for Category 3 by IRC Section 6046(c) and Reg. Section 1.6046-1(i): You are considered as owning the stock owned directly or indirectly by or for your brother and sister, your spouse, your ancestors, and your lineal descendants. There is no exception if your family members happen to be nonresident aliens. Also, you do not need to own any shares directly for this rule to apply. However, when stock is treated as owned by an individual through this rule, it shall not be treated as owned by that person for the purpose of again applying such rule in order to make another the constructive owner of such stock.
Additionally, under Reg. Section 1.6046-1(i), stock owned directly or indirectly by or for a foreign corporation or a foreign partnership is considered as being owned proportionately by its shareholders or partners. Therefore, any United States person who is a member of a foreign partnership that becomes a shareholder in a foreign corporation, shall be considered to be a shareholder in such foreign corporation to the extent of his/her proportionate share in the partnership.
Maria, a citizen of Brazil, came to the United States in 2018 and passed the substantial presence test. In 2018 she married Carlos, a US resident, and they filed a joint resident return. Neither Carlos nor Maria have ever had any ownership in a foreign corporation. However, Maria's father, a nonresident alien of the United States and a resident of Brazil, owns 100% of the stock of five corporations in Brazil, Corporation A, B, C, D and E. Maria owns by attribution 100% of the stock her father owns under Category 3, so Maria is required to file a separate Form 5471 for each of the five corporations as a Category 3 filer, since Maria became a United States person while meeting the 10% stock ownership requirement with respect to the five corporations. Carlos is not deemed to own any stock in the five corporations, because there is no attribution to Carlos from Maria's deemed ownership.
Category 4 Filer
This is a "United States person" who had "control" of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of the foreign corporation.
United States Person for Category 4: The rules under Category 4 are governed by IRC Section 6038 rather than Section 6046, and some definitions are a little different. For example for Category 4 purposes, "United States person" includes a nonresident alien for whom an election is in effect under IRC Section 6013(g) or (h) to be treated as a resident of the United States. See Reg. Section 1.6038-2(d)(3). These individuals are not considered "United States persons" under Categories 2 or 3. Domestic partnerships, corporations, estates and trusts are included in the definition under Category 4.
Control: This happens, for Category 4 purposes, when a United States person owns, at any time during their tax year, 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.
Ownership: You guessed it, there are attribution rules for Category 4, but they are different rules than for Category 3. For Category 4, IRC Section 318(a) determines family ownership. Under Section 318(a)(1), an individual is considered as owning the stock owned by his spouse, children, grandchildren and parents (but not brother or sister). See Reg. Section 1.6038-2(c). Also, under Reg. Section 1.6038-2(l), you are not required to file Form 5471 if 1) you do not directly own shares in the foreign corporation and 2) you are required to furnish information solely by reason of attribution of stock ownership from a nonresident alien. Conversely, apparently if you own any shares in a foreign corporation, and by attribution you own more than 50% of shares, even if the attribution is from a nonresident alien, you are a Category 4 filer.
For Category 4, Maria in Example I would be considered in control of the five corporations owned by her father by attribution. However, since Maria does not directly own stock in the corporations, under the exception in Reg. Section 1.6038-2(l), Maria is not required to file Form 5471 for any of the five corporations.
Assume the same facts as in Example I, but rather than owning no shares, Maria was gifted 5% of the stock of Corporation A in 2017, with her father owning the remaining shares, and Maria and her sister, Juanita, were each gifted 50% each of the shares of Corporations B, C, D and E in 2017. In 2018, Since Maria owns some stock in Corporation A directly, and all of her father's shares by attribution, Maria is in control of Corporation A for Category 4 purposes. The exception to filing Form 5471 under Reg. Section 1.6038-2(l) does not apply because Maria owns shares directly. Therefore, Maria is a Category 4 filer and must file Form 5471 each year she meets the control test. Maria is not in control of Corporations B, C, D and E, because even though she owns 50% of the stock of those corporations directly, she does not own the stock of Juanita under the attribution rules governing Category 4. Since Maria does not own more than 50% of the stock of these corporations directly or indirectly, she is not required to file Form 5471 as a Category 4 filer for Corporations B, C, D or E.
Category 5 Filer
This includes a "US shareholder" who owns stock in a foreign corporation that is a "controlled foreign corporation" for an uninterrupted period of 30 days or more during the tax year of the foreign corporation, and who owned that stock on the last day of such year. Form 5471 is required to be filed each year these conditions apply.
US Shareholder for Category 5: This generally includes only a United States person (generally as defined for FBAR filers) who owns (directly or indirectly), 10% or more of the total combined voting power of all classes of voting stock of the foreign corporation. (In other words, if you own less than 10% of the stock, either directly or indirectly, you are not a US shareholder.)
Controlled Foreign Corporation: This term is defined in Section 957 of the Code as any foreign corporation if more than 50% of 1) the total combined voting power of all classes of stock of such corporation entitled to vote, or 2) the total value of the stock of such corporation is owned by US shareholders on any day during the taxable year of such foreign corporation.
Indirect Ownership of Stock: Yes, here we go again. For Category 5, there are different attribution rules. Generally, an individual is considered as owning the stock owned by his spouse, children, grandchildren and parents (but not brother or sister). However, for this purpose, stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) is not considered as owned by a citizen or resident of the US See IRC Section 958(b) and Reg. Section 1.958-2(b)(3).
Assume the same facts as in Example III and assume Juanita is a US resident. Corporation A is not a controlled foreign corporation, because 95% of the stock is owned by Maria's father, a nonresident alien, and the father's stock is not deemed to be owned by Maria. Therefore, Maria is not a Category 5 filer. Even if over half the stock of Corporation A was owned by unrelated "US shareholders" (under the Category 5 definition), since Maria owns only 5% of the stock she would not be defined as a US shareholder. Corporations B, C, D and E are controlled foreign corporations, and Maria is a US shareholder, so she is a Category 5 filer for each of them.
When To File
Form 5471 is filed with your income tax return. Attach Form 5471 to your personal or corporate income tax return (or, if applicable, partnership or exempt organization return) and file both by the due date (including extensions) for that return.
What Happens If You Don't File?
Each category of Form 5471 carries a penalty of $10,000 for failure to file the form by the due date, or failure to show all the information required. Like all the other penalties, these penalties are forgiven for reasonable cause. See Code Sections 6679(a) and 6038(b).