What is form 5471:
Form 5471 is an information reporting form the must be filed with a taxpayer tax return when they meet certain ownership amounts of foreign corporations.
Broadly speaking, the form reports who owns the foreign corporation, the current year financial information of the foreign corporation, information related to subpart F and GILTI inclusions (discussed below), and the characterization of earnings impact of the corporation on the U.S. Shareholders.
Who has to file form 5471:
Generally speaking, U.S. Shareholders have to file form 5471. The annual filing requirements depend on how much of the foreign corporation is owned. There are instances where a person who owns no interest in a foreign corporation must file a form 5471, for that discussion, see Category 2 filer below.
Who is a U.S. Shareholder?
A U.S. Shareholder is a U.S. Person (individual, corporation, partnership, trust, estate) who owns 10% or more of the voting rights of a foreign corporation and/or who owns 10% or more of the value of a foreign corporation.
There is a separate rule when the foreign corporation is an insurance company. In that instance, a person will be a U.S. Shareholder if it owns ANY shares of the foreign corporation.
Do all U.S Shareholders have to file a form 5471?
The fast and terrible answer to this question is: it depends.
The form 5471 is required when a person (again individual, corporations, partnership, trust, estate) meets the requirements of one of several categories of filers for form 5471.
The current form 5471 category filers are broken out into the following categories:
- Category 1a, 1b, 1c
- Dealing with persons who are U.S. Shareholders of foreign corporations who were a Section 965 specified foreign corporation during the tax year including instances of constructive ownership.
- Category 2
- Dealing with U.S. individuals who are officers or directors of a foreign corporation in a year when a U.S. Person acquires 10% of the foreign corporation or acquires enough shares to exceed the 10% ownership threshold to become a U.S. Shareholder (as defined above).
- Notably, the director or officer does not have to own any interest in the foreign corporation for the filing obligations to exist and mee the requirements of a Category 2 filer.
- Category 3
- Dealing with U.S. persons when they acquire or dispose of shares in a foreign corporation such that that person becomes a U.S. Shareholder, stops being a U.S. Shareholder or adds 10% to their current holdings. It also covers when someone owing 10% or more becomes a U.S. person.
- Category 4
- Dealing with U.S. persons who are in control of a foreign corporation. That means they own, directly, indirectly or constructively 50% or more of the foreign corporation.
- Category 5a, 5b, 5c
- Dealing with U.S. persons who are U.S. Shareholder of a controlled foreign corporation. This includes certain constructive owners of controlled foreign corporations.
A U.S. person can fall into multiple categories per year.
There is a larger discussion of the category filers in this article (Link to other 5471 article) that also discusses constructive ownership rules.
There are several exceptions to the form filing obligations, so ensure you are taking those into account when making filing determinations.
If you meet one or more category filers, do you have to file every year you own the interest in the foreign corporation?
Not all U.S. Shareholders will need to file a form 5471 every year they are U.S. Shareholders. In any year that you meet the requirements of any of the Category filers, you will likely have a filing obligation if you don’t meet any of the exceptions.
As an example, in year 1 you (a U.S. individual) bought 15% of a foreign corporation. You are the only U.S. person who owns shares in the company. You are not related to any other shareholders. Since you now own more than 10% of the foreign corporation you are a U.S. Shareholder. In year 1 you have a form 5471 filing obligation as a Category 3 filer.
In year 2, you have not bought any more shares, and all the shareholders are the same. In year 2 you do not meet any of the category filer requirements and do not have a form 5471 filing obligation.
In continuation of the above example, if in year 3 you purchase an additional 15% of the foreign corporation (brining your total ownership to 30%) AND two other U.S. persons each bought 15% of the foreign corporation (30% total), you become a Category 1a, 3 and Category 5a filer. Thus, you will have a form 5471 filing obligation in year 3.
If in year 4 none of the facts change and the foreign corporation has three U.S. shareholders owning a collective 60%, the entity is considered a controlled foreign corporation and the form 5471 is required to be filed by U.S. Shareholders.
The important point to remember when owning shares in a foreign corporation is that you must review your holdings and the holdings of other shareholders annually to determine if you have a form 5471 filing requirement.
Why do you have to file form 5471?
The form 5471 is required to be filed as outlined in the U.S. tax code. The information provided allows the IRS to make determinations on a U.S. persons offshore investments and if any income should be included in the taxpayer U.S. tax base.
Broadly speaking, the form 5471 and the requirement to file the 5471 has no direct impact on a U.S. taxpayers taxable income. That being said, the form does require the taxpayer to report their proportionate share of Subpart F income and tested income.
What is Subpart F income and what is the point of computing tested income?
A detailed discussion of Subpart F income and tested income are beyond the scope of the article, but each play a key role with respect to form 5471.
Subpart F income is income earned by the controlled foreign corporation (Category 5a, b, c filing for U.S. Shareholders) that is not able to be deferred from U.S. income inclusions by U.S. shareholders. Very loosely, it is passive types of income and income earned in a company whereby that company hasn’t done any of the work to earn that income. Net earnings and profits of that type is required to be treated as if it were earned by the U.S. shareholders directly and is included in the U.S. shareholder taxable income. When a controlled foreign corporation has this type of income, it needs to be reported on the form 5471 and allocated appropriately to the U.S. Shareholders. Subpart F income is reported on Schedule I, J, P, and Q of the form 5471.
Tested income is used in computing the U.S. Shareholder amounts of Global Intangible Low Tax Income (GILTI). GITLI is another anti-deferral mechanism that prevents the earnings of a controlled foreign corporation from not being included in U.S. Shareholder taxable income. GILTI broadly treats all income of a controlled foreign corporation as if it were earned by the U.S. Shareholders directly and thus includable in their taxable income. Tested income is computed on Schedule I-1 of the form 5471.
Subpart F and GILTI are complicated topics that deserve their own discussions. There are numerous rules that impact the calculation and requirements of each. Suffice to say, if the entity you own an interest in is a controlled foreign corporation and you are U.S. Shareholder, careful attention must be paid to Subpart F income and GILTI income.
Do you have to file form 5471 if the entity you own is inactive or loses money?
Yes, mere ownership of the entity creates the filing obligation.
How do you file form 5471?
If you meet one of the categories of filers for the form 5471, you will need to complete the sections that are required of that specific category filer and attach it to your timely filed tax return. The form will be considered timely filed if it attached to your tax return which was timely filed including extensions. The form 5471 will need to be substantially complete to be considered timely.
If you fall into multiple category filer status, you need to file just one form 5471 per entity reporting all the information for each category you meet.
What happens if you don’t/didn’t file form 5471 or you file it late?
Failure to file form 5471 is subject to penalty. There is a monetary penalty of $10,000 for failure to file the form 5471. With this form, late filing is considered failure to file and subject to penalty. There is an additional $10,000 penalty for failure to file form 5471 Schedule O as well.
If you have not filed form 5471 and are required to do so you should contact our firm to discuss your options and the application of any penalties. We work with clients on their delinquent filings to assist with preventing or abating the penalty on late filings of form 5471.
If you have a form 5471 filing obligation you may have other information reporting forms to file as well. Additional filings that may apply could be:
- Foreign Bank Account Reporting (FBAR)
- Form 8938 foreign financial asset reporting
- Form 8865 foreign partnership reporting
- Form 926 contributions to foreign corporations
- Form 8858 foreign branch and disregarded entity reporting
- Form 8992 GILTI reporting
- Form 8621 Passive Foreign Investment Company (PFIC) reporting
Updates on Form 5471
In recent years, there have been some updates to Form 5471 that are worth noting. The IRS has made revisions to the form and its instructions to ensure that they remain current and accurate. These changes are designed to make the form easier to understand and fill out, and to ensure that it accurately reflects the current tax laws and regulations.
One of the key updates is the revision of Form 5471 and its separate Schedules E, G-1, H, I-1, and M in December 2021. The separate Schedules J, P, Q, and R were revised in December 2020, and the separate Schedule O was revised in December 2012. These revisions are part of the IRS’s ongoing efforts to keep the form and its schedules up to date with the latest tax laws and regulations.
Another important update is the requirement to report all information in functional currency in accordance with U.S. generally accepted accounting principles (GAAP). Each amount must also be reported in U.S. dollars translated from functional currency using GAAP translation rules. This change is designed to ensure that all financial information reported on Form 5471 is accurate and consistent.
The IRS has also updated the instructions for Form 5471. These instructions provide detailed guidance on how to fill out the form and its schedules. They include information on who needs to file Form 5471, what information needs to be reported, and how to report it. The instructions also provide examples to help taxpayers understand how to fill out the form correctly.
It’s important to note that these updates are part of the IRS’s ongoing efforts to improve the tax filing process and ensure that all taxpayers are reporting their foreign investments accurately. If you’re a U.S. person with ownership in a foreign corporation, it’s crucial to stay up to date with these changes to ensure that you’re meeting your tax reporting obligations.