Information Return with Respect to Certain Foreign Corporations, FORM 5471

When a foreign corporation is owned more than 50% by US persons directly, indirectly (through partnerships or trusts) or constructively under family attribution rules (spouse, children, grandchildren or parents) passive investment income (interest, dividends, capital gains, rents & royalties) must be reported on an annual basis as Subpart F income (dividend) by the shareholder(s). Subpart F income must be reported on the shareholders income tax return even when there are no distributions received from the CFC during the tax year. For operating companies or those foreign corporations that do not generate Subpart F income Form 5471 must still be filed by the US shareholder on an annual basis. Failure to file Form 5471 can result in a minimum $10,000 civil penalty per violation with additional penalties possible. Form 5471 must also be filed even when US ownership is less than 50% (although Subpart F does not apply in this case) in any year where the US taxpayer’s ownership changes by 10% or more. Lastly, Form 5471 must be filed in certain circumstances by US taxpayer who is an officer of the foreign corporation even if he or she is not a shareholder. 

Sorting through the various Categories of Filers and Form 5471 filing requirements of those shareholders of closely held foreign corporations can be challenging. To add to the complexity if a foreign corporation is not classified as a CFC (less than 50% US ownership) but is holding passive assets, it may also be classified as a Passive Foreign Investment Company (PFIC). This entails an additional PFIC tax regime, see PFIC page for more information. At Lancaster & Reed we work with CFC reporting on a daily basis. We ensure that our clients are reporting properly thereby reducing exposure to IRS penalties. Additionally, we work with our client’s and their counsel to achieve proper tax planning to avoid negative tax consequences of falling into Subpart F or PFIC reporting regimes when possible. Foreign Check-The-Box (C-T-B) entity elections can be utilized to achieve sophisticated structures that provide for proper planning in the foreign jurisdiction while maintaining tax advantaged solutions for US tax purposes including; passthrough of income at preferential tax rates and entity transparency. Put our experience to work for you!