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US Owned Foreign Corporations

US Owned Foreign Corporations

For individuals and businesses engaged in foreign investments and international business operations, navigating the complex landscape of US tax laws is a daunting task. One of the key forms that often comes into play in such scenarios is IRS Form 5471.

Form 5471 – What Is It, Who Must File It?

Form 5471 is an information return required of Americans who own foreign corporations or are officers or directors of a foreign corporation. The return enables the IRS to track which US citizens and resident aliens have ownership and management oversight over foreign corporations and in which foreign countries they operate.

Form 5471 bears some similarities to US domestic corporations’ federal return, which are C Corporations, Form 1120, with many of the same information and disclosure requirements.

Form 5471 must be filed by US persons who are either owners, directors or shareholders of foreign corporations and who fall within one of the four following categories:

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  1. A US person who is an officer or director of a foreign corporation in which any US person owns or acquires 10% or more of the stock of the foreign corporation,
  2. A person who becomes a US person while owning 10% or more of the stock of the foreign corporation,
  3. A US person who had control of a foreign corporation for at least 30 days, or
  4. A US shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for an uninterrupted period of at least 30 days and who owned that stock on the last day of that year.

The specific reporting requirements for Form 5471 will vary widely, depending on which of the categories of Form 5471 filer the foreign corporation falls under – ranging from mere reporting of general company information and stock ownership percentage, all the way up to including the corporation’s entire income statement and balance sheet in the return.

What is a Controlled Foreign Corporation (CFC)?

Some foreign corporations for which an officer, director or shareholder needs to report on Form 5471 are of a type known as a Controlled Foreign Corporation (CFC), which is a foreign corporation where US shareholders hold more than 50% stock ownership.  Classification of a foreign corporation as a CFC is an important distinction because an expat who is a shareholder of a CFC may be liable for a tax known as GILTI tax (Global Intangible Low-Taxed Income.)

Additionally, expats with ownership or control of CFCs will likely incur US income under complex IRS tax rules called Subpart F, whereby undistributed earned and profits of the foreign corporations are classified for US tax purposes are “deemed distributions” taxable to the owner.

When Is Form 5471 Due, and What Happens If I Don’t File It?

Expats are required to report information on Form 5471 and must include the form with their returns when filed. For the 2024 tax year, the deadline is on April 15, 2024. However, if you are an American living abroad, you get an automatic extension until June 17, 2024.

Penalties for failure to file a required Form 5471 are severe: $10,000 for each year in which it is not filed. If a taxpayer receives a notice from the IRS mandating filing of Form 5471 and it is not filed within 90 days, the IRS can assess an additional $10,000 per month (after the first 90 days), up to a total of $50,000.

How to file Form 5471?

IRS Form 5471 is a critical tool in ensuring that US taxpayers properly report their interests in foreign corporations and comply with international tax laws. While the form’s complexity can be intimidating, understanding its purpose and your specific filing requirements is essential for international tax compliance. If you have foreign investments or interests in foreign corporations, it’s advisable to seek advice from tax professionals specializing in US expat taxes to ensure accurate and timely filing of Form 5471.

If you require assistance with the completion of Form 5471, do not hesitate to reach out to Universal Tax Professionals. Our comprehensive range of US expat tax services is tailored to support all Americans living abroad. We can guide you in understanding the necessary reporting criteria for Form 5471 and to handle the preparation of the form for inclusion in your US expat tax return.