U.S. Persons And Their Investments In Foreign Corporations

It’s like the popular song from Disney, “It’s a Small World After All”! And it’s getting smaller as we speak! The global entrepreneur is a common phenom. Of course this leads to more tax compliance issues. The tax compliance issues can be solved by hiring a knowledgeable tax professional. To give you an overview of the requirements, here’s some information:

What is Form 5471?: If you are a U.S. person or a resident, and are an officer/ director or shareholder in certain foreign corporations, you have reporting requirements to satisfy Sections 6038 and 6046, and the related regulations. This is done via Form 5471.

Generally all U.S. persons or residents falling under the requirements of the Categories of Filers as specified in the instructions have to file Form 5471. The form has to be attached to one’s income tax return and has to be filed by the due date (including extensions) of the income tax return.

A separate form 5471 and applicable schedules have to be filed for each applicable foreign corporation.

Categories Of Filers: The definition of the U.S.person or resident is different for each category of filers. Instructions have to be read carefully & applied so that correct schedules are filed with the Form 5471. The details of these categories are available in the instructions for the form 5471. I recommend one should NEVER attempt filling this form without professional help.

What is a CFC?: A CFC is a foreign corporation that has US shareholders that own directly, indirectly or constructively within the meaning of sections 958 (a) and (b) on any day of the tax year of the foreign corporation, more than 50% of:

The total combined voting power of all classes of its voting stock or
The total value of the stock of the corporation.

Exceptions From Filing Form 5471:

• Multiple Filers of Same Information. One person may file Form 5471 and the applicable schedules for other persons who have the same filing requirements. The person filing forms 5471 must complete Item D on page 1 of the form. All the persons identified in Item D must attach a statement to their tax return that includes the information described in the instructions for Item D. Note: Exception exists for Category 3 filer.
• Domestic Corporations. Shareholders of a foreign insurance company that has elected to be treated as a domestic corporation and has filed U.S. income tax return for its tax year under provisions of section 953(d).
• Members Of Consolidated Groups.A category 4 filer is not required to file form 5471 for a corporation that files a consolidated return for the tax year.
• Constructive Owners. Various categories of filers are considered constructive owners under different conditions.

Additional Filing Requirements: There are additional filing requirements for:

• Category 3 filers;
• Certain category 2 & 3 filers who are shareholders, officers and directors of Foreign sales corporations (FSCs);
• If a Section 338 election is made with respect to a qualified stock purchase of a foreign target corporation;
• Reportable transaction disclosure statement, Form 8886 as indicated in Regulations section 1.6011-4(c)(3)(i)(G). There are penalties for failure to report such transactions under section 6011;
• Material advisors;
• Holders of other foreign financial assets. Form 8938 may have to be filed due to threshold requirements.

Penalties: There are civil & criminal penalties for failure to file, and failure to furnish information on form 5471 and certain schedules.

• Failure to file information required by Section 6038(a)
• Failure to file information required by Section 6046

Bibliography: Form 5471 & Instructions; Section 1.6011-4 Regulations; Guidance Reg Election under Section 953d; IRC 6046.

In accordance with Circular 230 Disclosure

Original Source By: Manasa Nadig

I am Manasa Nadig, enrolled to practice and represent taxpayers with the Internal Revenue Service. I have been in the business of Tax Preparation & Tax Planning since 1999. My firm, MN Tax Solutions, LLC is based in Michigan, USA. Please connect with me on TaxConnections for more information about myself & the services provided by my firm.

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