What is Form 5471, and Do I Need to File It?
If you own a foreign corporation and live in the US, there is a high probability you need to file Form 5471 - Information Return of U.S. Persons With Respect To Certain Foreign Corporations. While there are some additional complexities arising from passage of the Tax Cuts and Jobs Act (TCJA) in 2017, such complexities are generally only triggered if you have a filing obligation.
What the heck does that mean? A filing obligation is an IRS requirement to file a particular Form or Schedule with your tax returns. Form 5471 is what is known in the trade as an informational filing, meaning it is (somewhat) separate from the calculation of taxable income and tax due. To give an example, even if you have no taxable income ($0), you are still obliged to file this form if the form instructions require it.
So what do the form instructions say? Form 5471 has several different schedules (each requiring different information about your foreign corporation), but not all schedules have to be completed in every case. Whether a schedule is required to be completed depends on how much ownership you have, have acquired, or of which you have disposed. Ownership is usually measured based on percentage of stock ownership, and the percentages to watch for are 10 percent and 51 percent. Ten percent ownership held, increased, or decreased in the current tax year can trigger a filing obligation under Categories 1-3 of Form 5471, and 51 percent held can trigger filing obligations under Categories 4 and 5.
However, before taking a brief look at these specifics, there are a couple of questions you should ask first:
Am I considered a US person (based on citizenship or residency, see Article “How Do I Know If I am a US Resident?”)?
Do any of my relatives or related business entities or trusts own any shares in the foreign corporation?
Is my ownership in the foreign corporation based on value, voting power, or both?
If you are not a U.S. citizen or resident (including residency based on substantial presence), and no other shareholders are U.S. citizens or residents, you can stop this analysis now. Only U.S. persons and owners of Controlled Foreign Corporations (CFCs) are required to file Form 5471 (note, this is not true of Form 5472, covered in a forthcoming article). A simple definition of a CFC - it is a foreign corporation where at least 51 percent of ownership is held by US persons. If you have no direct ownership in the foreign corporation (meaning you do not own ANY percentage of stock), and you are only required to file because of attribution, you are also excused from filing.
A simple definition of attribution - it means stock you are treated as owning because:
Another business or trust you own in turn owns the stock, or
The stock is owned by your spouse, children, grandchildren, parents, and siblings.
Finally, you should note that you may be treated as owning a percentage of stock regardless of whether ownership is measured in total value of the corporation (for instance, preferred shares with no voting rights) or voting power (e.g., common voting shares).
In sum, here are the Categories of Form 5471 that require you to file:
Category 1:
You must be a U.S. citizen or resident
The corporation must be incorporated outside the USUS persons (citizenship or residency) own any percent of foreign corporation stock, or foreign corporation is a CFC
You must own in the current tax year:
At least 10 percent (voting power only) direct ownership of foreign corporation stock, or
Own any percent of stock directly, and own at least 10 percent (voting power only) foreign corporation stock through attribution when combined with stock owned by spouse, children, grandchildren, parents, and/or siblings.
Category 2:
You must be a U.S. citizen or resident
The corporation must be incorporated outside the US
You must have acquired in the current tax year:
At least 10 percent (voting power or value) direct ownership of foreign corporation stock, or
Own any percent of stock directly, and have acquired at least 10 percent (voting power or value) foreign corporation stock through attribution when combined with stock owned by spouse, children, grandchildren, parents, and/or siblings.
Category 3:
You must be a U.S. citizen or resident
The corporation must be incorporated outside the US
You must have acquired or disposed of in the current tax year:
At least 10 percent (voting power or value) direct ownership of foreign corporation stock, or
Own any percent of stock directly, and have acquired at least 10 percent (voting power or value) foreign corporation stock through attribution when combined with stock owned by spouse, children, grandchildren, parents, and/or siblings, or
At least 10 percent (voting power or value) foreign corporation stock by becoming a US citizen or resident, or
Foreign corporation stock (voting power or value - disposal only) and own less than 10% after disposal.
Category 4:
You must be a U.S. citizen or resident
The corporation must be incorporated outside the US
You must hold 51 percent (voting power or value) or more of foreign corporation stock:
By direct ownership, or
Combined with stock held by spouse, children, grandchildren, and parents, or
Combined with stock held through other entities
Ownership must have been held for at least 30 consecutive days during the foreign corporation’s fiscal year.
Category 5:
You must be a U.S. citizen or resident
The corporation must be incorporated outside the USUS persons (citizenship or residency) own 51 percent or more of foreign corporation stock
You must hold 10 percent (voting power or value) or more of foreign corporation stock:
By direct ownership, or
Combined with stock held by spouse, children, grandchildren, and parents, or
Combined with stock held through other entities.
This analysis is shortened from the actual filing rules, and does not encompass all situations and exceptions. We have compiled this information to illustrate some of the challenges when filing US returns as a multinational person, and we invite inquiries whether you are an expat, inpat, cross-border traveler, executive, digital nomad, or tax advisor.
