When do you need to file Form 5471

If a US Citizen own 10% or more of a foreign corporation (a corporation organized outside of the USA) you are obligated to filed Form 5471 each year with your personal tax return (or your business corporation or LLC tax return if that is the owner of the foreign corporation). ( see following paragraph ) On this form you must report the ownership of the corporation and other data. It also includes a balance sheet for the corporation and income and expense sheet for the current year for the corporation.

You are only required to file the form 5471 if your holdings are in excess of 50% however in any year if your equity interests increases or decreases by 10% you are required to file the form .

The return also must include data on transactions between you and the foreign corporation, original capital contributions, and other relevant data. That return is 4 pages and several other schedules are required which can make it a 6 or seven page return. The amount of schedules required are based on your ownership interest in the foreign corporation.

Subpart F Income

If you combined with other US taxpayers own more than 50% of actual or equitable interest in your foreign corporation, it is then defined as a Controlled Foreign Corporation (CFC), If it is a CFC, certain types of income (Subpart F income) may be taxed and flow through to the US shareholders and cause them to pay tax on that income on their US personal or business tax returns. The rules are complex with respect to determining the types income of a CFC are subpart F income.

Certain types of income such as dividends, interest, rental income, insurance income, offshore shipping income and personal service income is treated as Subpart F income. Subpart F income whether distributed or not is taxable to the US shareholders personal return (or corporate return if a US corporation is the owner) in the year it occurs as ordinary income. However, the income in a Controlled corporation from other types of operating businesses such retail stores, factories, etc. that do not have operations in the US and do not purchase goods from a US affiliate of the business is not taxed to the Controlled Corporation shareholders until it is actual distributed to them.

Dividends paid to shareholders of Foreign Corporations sometimes are eligible for the reduced qualified dividend rate (same rate as capital gains) when paid from the foreign corporation that is located in a country with which the US has a tax treaty and not subpart F income from a Controlled Foreign Corporation.

Certain types of foreign corporations (the type varies by Country) have been identified by the IRS as eligible to elect, for US tax purposes only, to be treated as flow through entities. This means that if the election is made by filing the appropriate form with the IRS, all of the income and expenses of that foreign entity will flow through and be taxed on the income tax returns of the US shareholder in the same manner as US partnership and LLC income flows through and is taxed on the tax returns of the owners. This often is an advantage if most of the net income is distributed to the shareholders since it allows them to claim the foreign taxes paid by the foreign corporation as a foreign tax credit against their US income tax on that flow through income and partially or totally offset that us income tax.

If you own part of a foreign partnership, foreign LLC or Foreign Trust, you are also obligated to file special forms with your US tax return or you may incur substantial penalties of $10,000 or more for filing those forms late or not at all. The IRS is currently on a serious crusade to force all US taxpayers to report their foreign income or ownership of foreign business or investment entities. It is not advisable to ignore these rules due to the possible severe penalties you will incur if your are caught not complying with the law or filing those forms late
Preparation of Form 5471 is often complex and confusing. Even many tax preparers do not know how to prepare the forms and may need assistance. Contact us at info@universaltaxprofessionals.com if you need assistance with preparing a form 5471.

About the author...

Joshua Katz, CPA

After working for several accounting large firms, I founded Universal Tax Professionals because I knew I could give expats more personalized services at lower rates. Feel free to email me directly at josh@universaltaxprofessionals.com.

Joshua Katz, CPA