Form 5471: Annual Foreign Corporation Reporting & Instructions

Form 5471 Reporting & Filing Requirements

Form 5471 Reporting & Filing Requirements

Form 5471 & Instructions

Form 5471 & Instructions: Each year, US Taxpayers with foreign assets may have a myriad of different IRS international information return reporting requirements to contend with. Which form(s) the US taxpayer is required to file depends on the category of foreign asset — along with the ownership value in total asset ownership. For example, when a US person has an interest in a Foreign Corporation, they may have to file a Form 8938 or 5471 — or both in the same year if they have various assets with varying degrees of ownership. Of all the different international information reporting forms and varying levels of difficulty — form 5471 is one of the most difficult, if not because many taxpayers just do not have any background in Balance Sheets and Profit and Loss statements. While it is hard to consolidate the key information about reporting Form 5471 into one article — we will do our best to walk you down the path of preparing IRS Form 5471 and peel away the outer layers of the onion to help you get to the point where you may be able to file it yourself — noting, if you have prior year undisclosed forms, you may want to submit to one of the offshore amnesty programs before filing for the current year.

Who Has to File Form 5471?

When a US person has certain ownership or control over a Foreign Corporation, they may have a form 5471 filing requirement. There are five (5) different categories of filers — and some of the categories can be further broken down into sub-categories, depending on the specific type of ownership. Let’s go through the basic categories:

Category 1 Filer

      • These categories include a U.S. shareholder of a foreign corporation that is a section 965 specified foreign corporation (SFC) (defined below) at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was an SFC, taking into account the regulations under section 965.

      • However, see Certain Category 1 and Category 5 Filers, later, which may apply.

What does this Mean?

This means that — in most scenarios — US individuals who are considered to have 10% or more ownership over a controlled foreign Corporation will have to file Form 5471. There are also requirements for corporations with ownership/interest in other corporations, but for the individual, it is generally for owners of CFCs.

Category 2 Filer

      • This category includes a U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person (defined below) has acquired (in one or more 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 stock of the foreign corporation.

What does this Mean?

This generally means when a US Person is an officer or director of a foreign corporation in which a US Person obtains 10% stock of value, then Category 2 requirements kick in.

Category 3 Filer

      • A U.S. person (see Category 2 Filer above for definition) 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 with respect 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

      • A U.S. person who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the 10% stock ownership requirement. For more information, see section 6046 and Regulations section 1.6046-1.

What does this Mean?

It generally refers to a US Person who — when they acquire stock or additional stock — have 10% stock ownership in the foreign corporation. Another common scenario is when a non-US Person has 10% or more and then becomes a US Person in that year.

Category 4 Filer

      • This category includes a U.S. person who had control (defined below) of a foreign corporation during the annual accounting period of the foreign corporation.

What does this Mean?

When a US Person (need not be an officer or director) has control of a foreign corporation, then they are required to disclose the information on Form 5471 under Category 4 Filer.

Category 5 Filer

      • These categories include a U.S. shareholder who owns stock in a foreign corporation that is a CFC at any time during any tax year of the foreign corporation, and who owned that stock on the last day in that year on which it was a CFC.

What does this Mean?

Essentially, this category is designed to cover all your shareholders who had any time during the year own stock in a foreign corporation that qualifies as a CFC. The difference between category 5 and category one is that category one includes SFCs — which is more than just CFC’s.

Rev. Proc. 2019-40 & Form 5471

    • Certain Category 1 and Category 5 Filers Rev. Proc. 2019-40 provides relief for certain types of Category 5 filers.

      • This revenue procedure generally provides guidance related to the repeal of section 958(b)(4) of the Internal Revenue Code (“Code”) to certain United States persons within the meaning of section 7701(a)(30) (“U.S. persons”) that own stock in certain foreign corporations.

      • Section 2 of this revenue procedure provides background on section 958.

      • Section 3 of this revenue procedure provides definitions of terms used in this revenue procedure.

      • Section 4 of this revenue procedure provides a safe harbor for determining whether a foreign corporation is a controlled foreign corporation within the meaning of section 957 (“CFC”).

      • Section 5 of this revenue procedure provides a safe harbor for determining certain items, including taxable income and earnings and profits (“E&P”), of a CFC based on alternative information (as defined in section 3.01 of this revenue procedure).

      • Section 6 of this revenue procedure provides a safe harbor for 2 determining certain items of a specified foreign corporation within the meaning of section 965(e) and §1.965-1(f)(45) (“SFC”) based on alternative information.

      • Section 7 of this revenue procedure addresses penalties under sections 6038 and 6662.

      • Section 8 of this revenue procedure describes modifications to be made with respect to filing requirements for Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations.

      • Section 9 of this revenue procedure provides examples illustrating rules described in this revenue procedure.

      • Section 10 of this revenue procedure provides applicability dates.

      • Section 11 of this revenue procedure provides drafting information. The Department of the Treasury (“Treasury Department”) and the Internal Revenue Service (“IRS”) expect to issue other guidance related to certain other consequences of the repeal of section 958(b)(4) separately.

Schedule A Stock of the Foreign Corporation for 5471

Under Schedule A, the filer is required to include a description of each type of stock — including the total amount of stock issued by the Corporation at the beginning of the accounting period, and at the end of the accounting period.

  • It is important to note, that it is not asking how many shares the filer has but rather the total types of stock the Corporation issues and the total number of shares issued for the accounting period.

Schedule B Shareholders of Foreign Corporation on Form 5471

Schedule B can be broken down into two parts: Part 1 and Part 2.

Part I

Category three and four filers are required to complete part one for US persons who either directly or indirectly own 10% or more in value or voting power of any class of stock.

Part I refers to information about the specific shareholders of the foreign Corporation who are considered US shareholders. for each US shareholder, the form requires the filer to provide:

      • Name

      • Address

      • Identifying Number of Shareholder

      • Description of Stock

      • Number of shares at Beginning of Account Period

      • Number of shares at End of Account Period

Part II

Part 2 is required by filers who qualify as categories:

  • 1a & 1c
  • 3
  • 4
  • 5a & 5c

Part 2 generally asks for the same information required in part one.

Schedule C Income Statement for Form 5471

Schedule C is the part a form 5471 that begins to get more difficult. It requires the filer to complete an income statement, where the filer must identify the income, deductions, net income and other comprehensive Income — in both functional and US currency.

As provided by the form:

      • Report all information in functional currency in accordance with U.S. GAAP. Also, report each amount in U.S. dollars translated from functional currency (using GAAP translation rules).

      • However, if the functional currency is the U.S. dollar, complete only the U.S. Dollars column. See instructions for special rules for DASTM corporations.

Income

      • 1a. Gross receipts or sales

      • 1a. b Returns and allowances

      • 1c. Subtract line 1b from line 1a

      • 2. Cost of goods sold

      • 3. Gross profit (subtract line 2 from line 1c)

      • 4. Dividends

      • 5. Interest

      • 6a. Gross rents

      • 6b. Gross royalties and license fees  

      • 7 .Net gain or (loss) on sale of capital assets

      • 8a. Foreign currency transaction gain or loss—unrealized

      • 8b. Foreign currency transaction gain or loss—realized

      • 9. Other income (attach statement)

      • 10. Total income (add lines 3 through 9)

Deductions

      • 11. Compensation not deducted elsewhere

      • 12a. Rents

      • 12b. Royalties and license fees

      • 13. Interest

      • 14. Depreciation not deducted elsewhere

      • 15. Depletion

      • 16. Taxes (exclude income tax expense (benefit))

      • 17. Other deductions (attach statement—exclude income tax expense (benefit))

Net Income

      • 18. Total deductions (add lines 11 through 17)

      • 19. Net income or (loss) before unusual or infrequently occurring items, and income tax expense (benefit) (subtract line 18 from line 10)

      • 20. Unusual or infrequently occurring items

      • 21a. Income tax expense (benefit)—current

      • 21b. Income tax expense (benefit)—deferred

      • 22. Current year net income or (loss) per books (combine lines 19 through 21b)

Other Comprehensive Income

      • 23a. Foreign currency translation adjustments

      • 23b. Other

      • 23c. Income tax expense (benefit) related to other comprehensive income

      • 24. Other comprehensive income (loss), net of tax (line 23a plus line 23b less line 23c)

Schedule F Balance Sheet for Form 5471

When Taxpayers come to us with their hands up letting us know they have all but given up on the process and please help, is when they get to the balance sheet. The idea of the balance sheet is that you balance the assets against liability and equity. In other words, the value of the assets should balance with the value of the liabilities and equity. If it doesn’t balance then the balance sheet is off and it’s just a very easy way for the IRS to audit you on it.

Assets

      • 1. Cash

      • 2a. Trade notes and accounts receivable

      • 2b. Less allowance for bad debts

      • 3. Derivatives

      • 4. Inventories

      • 5. Other current assets (attach statement)

      • 6. Loans to shareholders and other related persons

      • 7. Investment in subsidiaries (attach statement)

      • 8. Other investments (attach statement)

      • 9a. Buildings and other depreciable assets

      • 9b. Less accumulated depreciation

      • 10a. Depletable assets

      • 10b. Less accumulated depletion

      • 11. Land (net of any amortization)

      • 12. Intangible assets:

      • 12a. Goodwill

      • 12b. Organization costs

      • 12c. Patents, trademarks, and other intangible assets 

      • 12d. Less accumulated amortization for lines 12a, 12b, and 12c

      • 13. Other assets (attach statement)

      • 14. Total assets

Liabilities and Shareholders’ Equity

      • 15. Accounts payable

      • 16. Other current liabilities (attach statement)

      • 17. Derivatives

      • 18. Loans from shareholders and other related persons

      • 19. Other liabilities (attach statement)

      • 20. Capital stock:

        • a Preferred stock

        • b Common stock

      • 21. Paid-in or capital surplus (attach reconciliation)

      • 22. Retained earnings

      • 23. Less cost of treasury stock

      • 24. Total liabilities and shareholders’ equity

Schedule G Other Information Form 5471

There is another section for schedule G which asked the taxpayer lots of different questions about their ownership in the foreign Corporation, whether they were disregarded, base erosion, and other more complex matters.it is important that the taxpayer go through the information in detail to make sure none of it applies to them — and if it does, then to make sure it is marked accordingly

Schedule I Summary of Shareholder’s Income From Foreign Corporation

Section I us used in order to tally up all of the income associated with the foreign Corporation. it asks about very specific types of income, with the focus on subpart F and other extraordinary income.

      • 1 a. Section 964(e)(4) subpart F dividend income from the sale of stock of a lower-tier foreign corporation (see instructions)

      • Section 245A(e)(2) subpart F income from hybrid dividends of tiered corporations (see instructions) .

      • Subpart F income from tiered extraordinary disposition amounts not eligible for subpart F exception under section 954(c)(6)

      • Subpart F income from tiered extraordinary reduction amounts not eligible for subpart F exception under section 954(c)(6)

      • Section 954(c) Subpart F Foreign Personal Holding Company Income (enter result from Worksheet A)

      • Section 954(d) Subpart F Foreign Base Company Sales Income (enter result from Worksheet A)

      • Section 954(e) Subpart F Foreign Base Company Services Income (enter result from Worksheet A) .

      • Other subpart F income (enter result from Worksheet A)

      • 2. Earnings invested in U.S. property (enter the result from Worksheet B)

      • 3. Reserved for future use

      • 4. Factoring income

        • See instructions for reporting amounts on lines 1, 2, and 4 on your income tax return.

      • 5a. Section 245A eligible dividends (see instructions)

      • b. Extraordinary disposition amounts (see instructions)

      • c. Extraordinary reduction amounts (see instructions)

      • d. Section 245A(e) dividends (see instructions)

      • e. Dividends not reported on line 5a, 5b, 5c, or 5d

      • 6. Exchange gain or (loss) on a distribution of previously taxed earnings and profits

      • 7a. Was any income of the foreign corporation blocked?

      • b. Did any such income become unblocked during the tax year (see section 964(b))? If the answer to either question is “Yes,” attach an explanation.

      • 8a. Did this U.S. shareholder have an extraordinary disposition (ED) account with respect to the foreign corporation at any time during the tax year (see instructions?

      • b. If the answer to question 8a is “Yes,” enter the U.S. shareholder’s ED account balance at the beginning of the CFC year $ and at the end of the tax year $. Provide an attachment detailing any changes from the beginning to the ending balances.

      • c. Enter the CFC’s aggregate ED account balance with respect to all U.S. shareholders at the beginning of the CFC year $ and at the end of the tax year $. Provide an attachment detailing any changes from the beginning to the ending balances.

      • 9. Enter the sum of the hybrid deduction accounts with respect to stock of the foreign corporation (see instructions) $ Form 5471 (Rev. 12-2020)

Separate Schedule (There’s More)

As if the comprehensive form 5471 is not in and of itself complicated enough, there are several potential separate schedules that you may also have to complete in addition to the schedule is included as part of the actual form.

      • Separate Schedule I-1

      • Separate Schedule J

      • Separate Schedule M

      • Separate Schedule O, Part I

      • Separate Schedule O, Part II

      • Separate Schedule P

      • Separate Schedule

      • Separate Schedule R

This is probably enough information for one article, and if you’re still awake will be posting additional articles identifying the separate schedules and instructions for each one of those as well.

Form 5471 is a Tax Adventure

In conclusion, when it comes to international information reporting, Form 5471 is one of the more complicated international reporting forms. it is important to properly assess and evaluate the business information before attacking the form and then carefully and methodically moving through each section. If it gets too overwhelming, you may want to consider retaining a specialist to assist you.

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