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Reporting Investments In Certain Foreign Corporations for U.S. Tax Purposes


As we increasingly become more connected on this planet US Taxpayers are compelled more than ever before to hold investments in multiple countries. As a direct result timely filingIRS Form 5471is becoming profoundly significant. I’ve been involved with enough international tax matters to appreciate this form and subsequent schedules. This post is a summary of my experiences to date.

Basically if you are a U.S. citizen or resident who is an officer, director, or 10% shareholder in certain foreign corporations this form is required to satisfy the reporting obligations of IRC 6038,andIRC 6046and related regulations. Generally speaking, all U.S. persons described in Categories of Filers below must completethe schedules, statements, and/or other information.

If you are described in more than one filing category, do not duplicate information. However, complete all items that apply. For example, if you are the sole owner of a controlled foreign corporation(CFC) (i.e., you are described in Categories 4 and 5), complete all four pages of Form 5471 and separate Schedules J and M.Please note that you must complete a separate Form 5471 and all applicable schedules for each foreign corporation. There are 5 Categories of Filers.

Category 1 Filer

Basically don’t worry about this category as this filing requirement has been repealed by section 413(c)(26) of the AmericanJobs Creation Act of 2004, which repealed section 6035.

Category 2 Filer

This includes a U.S. citizen or resident who is an officer or director of a foreigncorporation in which a U.S. person (defined below) has acquired (in one ormore transactions):

1. Stock which meets the 10% stock ownership requirement (described below)with respect to the foreign corporation or

2. An additional 10% or more (in value or voting power) of the outstanding stockof the foreign corporation.

A U.S. person has acquired stock in a foreign corporation when that person hasan unqualified right to receive the stock, even though the stock is not actuallyissued. See Regulations section 1.6046-1(f)(1) for more details.

Stock ownership requirement. For purposes of Category 2 and Category 3,the stock ownership threshold is met if a U.S. person owns:

1. 10% or more of the total value of the foreign corporation’s stock or

2. 10% or more of the total combined voting power of all classes of stock withvoting rights.

U.S. person. For purposes of Category 2 and Category 3, a U.S. person is:

1. A citizen or resident of the United States,
2. A domestic partnership,
3. A domestic corporation, and
4. An estate or trust that is not a foreign estate or trust defined in section7701(a)(31).See Regulations section 1.6046-1(f)(3)for exceptions.

Category 3 Filer

This category includes:

A U.S. person (defined above) who acquires stock in a foreign corporation which, when added to any stock owned on the date of acquisition, meets the 10% stock ownership requirement (described above) with respect to the foreign corporation;

A U.S. person who acquires stock which, without regard to stock already owned on the date of acquisition, meets the 10% stock ownership requirement withrespect to the foreign corporation;

A person who is treated as a U.S. shareholder under section 953(c) with respect to the foreign corporation;A person who becomes a U.S. person while meeting the 10% stock ownership requirement with respect to the foreign corporation;

or

sufficient stock in the foreign corporation to reduce his or her interest to less than the stock ownership requirement.

For more information, see IRC 6046 and Regulations section 1.6046-1.

Category 4 Filer

This includes a U.S. person who had control (defined below) of a foreigncorporation for an uninterrupted period of at least 30 days during the annualaccounting period of the foreign corporation.

For purposes ofCategory 4, a U.S. person is:

1. A citizen or resident of the United States;
2. A nonresident alien for whom an election is in effect under section 6013(g)to be treated as a resident of the United States;
3. An individual for whom an election is in effect under section 6013(h), relatingto nonresident aliens who become residents of the United States during thetax year and are married at the close of the tax year to a citizen or United States resident;
4. A domestic partnership;
5. A domestic corporation; and
6. An estate or trust that is not a foreign estate or trust defined in section7701(a)(31).

See Regulations section 1.6038-2(d) for exceptions.

Control

A U.S. person has control of a foreign corporation if, at any time duringthat person’s tax year, it owns stock possessing:

1. More than 50% of the total combined voting power of all classes ofstock of the foreign corporation entitled to vote or
2. More than 50% of the total value of shares of all classes of stock of the foreigncorporation.

A person in control of a corporation that, in turn, owns more than 50% of thecombined voting power, or the value, of all classes of stock of another corporation is also treated as being in control of such other corporation.

Example

Corporation A owns 51% of the voting stock in Corporation B.
Corporation B owns 51% of the voting stock in Corporation C. Corporation Cowns 51% of the voting stock in Corporation D. Therefore, Corporation Dis controlled by Corporation A.

For more details on “control,” see Regulations sections 1.6038-2(b) and (c).

Category 5 Filer

This includes a U.S. shareholder who owns stock in a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and who owned that stock on the last day of that year.

U.S. shareholder.

For purposes of Category 5, a U.S. shareholder is a U.S. person who:

1. Owns (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) 10% or more of the total combined voting power of allclasses of voting stock of a CFC or

2. Owns (either directly or indirectly, within the meaning of section 958(a)) anystock of a CFC (as defined in sections 953(c)(1)(B) and 957(b)) that is also acaptive insurance company.

U.S. person. For purposes ofCategory 5, a U.S. person is:

1. A citizen or resident of the United States,
2. A domestic partnership,
3. A domestic corporation, and
4. An estate or trust that is not a foreign estate or trust defined insection 7701(a)(31).

See IRC 957(c) for exceptions.

CFC

A CFC is a foreign corporation that has U.S. shareholders that own (directly,indirectly, or constructively, within the meaning of sections 958(a) and (b)) onany day of the tax year of the foreign corporation, more than 50% of:

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

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