International Tax Series: Be Aware of the Form 5471 Filing Requirement if a U.S. Person Owns Stock in a Foreign Corporation

The Form 5471 may need to be filed if a U.S. person owns an interest in a foreign corporation.  A foreign entity is required to be classified as a foreign corporation for U.S. tax purposes if the foreign entity is on the U.S. list of per se foreign corporations.  The list of per se foreign corporations is provided in the IRS instructions to the Form 8832 check-the-box entity classification election and in Treas. Reg. Section 301.7701-2(b)(8).

There are four main categories of filers that are required to file the Form 5471:

1. A U.S. person who is an officer or director of a foreign corporation is required to file the Form 5471 as a Category 2 filer if a U.S. person has acquired an initial 10% or an additional 10% of the vote or value of the stock in the foreign corporation.
2. A U.S. person who acquires 10% of the stock in a foreign corporation is required to file the Form 5471 as a Category 3 filer.
3. A U.S. person who controls, i.e., owns more than 50% of the vote or value of the stock in a foreign corporation is required to file the Form 5471 as a Category 4 filer.
4. A U.S. person who owns directly, indirectly or constructively 10% or more of the voting stock of a controlled foreign corporation (CFC) is required to file the Form 5471 as a Category 5 filer.  A CFC is a foreign corporation of which more than 50% of the vote or value of the stock is owned by U.S. shareholders who each own at least 10% of the voting stock.

The Form 5471 requires the income statement of the foreign corporation to be reported in functional foreign currency and U.S. dollars.  The Form 5471 requires the balance sheet of the foreign corporation to be translated from functional foreign currency to U.S. dollars in accordance with U.S. GAAP.  Certain transactions between U.S. persons filing the Form 5471 or certain related parties and the foreign corporation are required to be reported on Schedule M of the Form 5471.

A $10,000 penalty applies for the failure to timely file the Form 5471 or if the Form 5471 is considered to be incomplete or inaccurate when filed.  The Form 5471 is filed with the U.S. filer’s U.S. federal income tax return.  The $10,000 penalty will apply automatically if the U.S. filer’s U.S. federal income tax return is filed late and the return includes the Form 5471.

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