What Is Form 5471?

Form 5471

If you are a US person (individual, corporation, partnership, S-corporation, trust, tax-exempt entity) who owns an interest in a foreign corporation, you may have a form 5471 filing obligation.

Form 5471 is a form that is reported on your US income tax return (1040, 1120, 1065, 1120-S, 1041, 990, 990-T) when you meet certain ownership thresholds of a foreign corporation. The form is used to show your ownership of a foreign corporation, the corporation’s earnings and balance sheet, and it is used to report items subject to Subpart F income and GILTI inclusions.

The form 5471 and the requirement to file the 5471 has no direct impact on a U.S. taxpayers’ taxable income. The form does require the taxpayer to report their proportionate share of Subpart F income and tested income (used to compute GILTI inclusions).

The form 5471 filing obligation is compulsory if you meet the filing requirements. Failure to timely file the form may subject you to penalty.

Preparing form 5471 and determining of it is required to filed are complicated. You should seek advice when you own any shares of a foreign corporation.

Who has to file form 5471:

If you are considered a U.S. Shareholder, you may have to file form 5471. A U.S. Shareholder is a U.S. Person who owns 10% or more of the voting rights of a foreign corporation and/or who owns 10% or more of the value of a foreign corporation. A U.S. Shareholder may also me an US person who owns any amount of a foreign insurance company.

The annual filing requirements depend on how much of the foreign corporation is owned by the U.S. Shareholder. There are also time when person who owns no interest in a foreign corporation must file a form 5471, for that discussion, see Category 2 filer below.

The form 5471 is required when a person meets the requirements of one of several categories of filers for form 5471.

The current form 5471 category filers are broken out into the following categories:

• Category 1a, 1b, 1c
  • Persons who are U.S. Shareholders of foreign corporations who were a Section 965 specified foreign corporation during the tax year including instances of constructive ownership.
• Category 2
  • U.S. individuals who are officers or directors of a foreign corporation may need to file form 5471.
• Category 3
  • When a U.S. person acquires or disposes of shares in a foreign corporation such that the person’s interest exceeds 10% or goes over 10% or falls below 10%
• Category 4
  • U.S. persons who are in control of a foreign corporation. That means they own, directly, indirectly or constructively 50% or more of the foreign corporation.
• Category 5a, 5b, 5c
  • U.S. persons who are a U.S. Shareholder of a controlled foreign corporation. This includes certain constructive owners of controlled foreign corporations.

A U.S. person may fit into multiple categories per year.

Exceptions to form 5471 filing obligations do exist, so ensure you are taking those into account when making filing determinations.

What is Subpart F income and what is the point of computing tested income?

Subpart F income is income earned by the controlled foreign corporation (Category 5a, b, c filing for U.S. Shareholders) that may be included in the U.S. Shareholder’s taxable income, whether or not the income has been distributed from the foreign corporation. Brod, it is passive types of income and income earned in a company whereby that company hasn’t done any of the work to earn that income. Net earnings and profits of that type is required to be treated as if it were earned by the U.S. shareholders directly and is included in the U.S. shareholder taxable income.  When a controlled foreign corporation has this type of income, it needs to be reported on the form 5471 and allocated appropriately to the U.S. Shareholders. Subpart F income is reported on Schedule I, J, P, and Q of the form 5471.

Tested income is used in computing the U.S. Shareholder amounts of Global Intangible Low Tax Income (GILTI). GITLI is another anti-deferral mechanism that prevents the earnings of a controlled foreign corporation from not being included in U.S. Shareholder taxable income. GILTI broadly treats all income of a controlled foreign corporation as if it were earned by the U.S. Shareholders directly and thus includable in their taxable income. Tested income is computed on Schedule I-1 of the form 5471.

Subpart F and GILTI are complicated topics that deserve their own discussions. There are numerous rules that impact the calculation and requirements of each. Suffice to say, if the entity you own an interest in is a controlled foreign corporation and you are U.S. Shareholder, careful attention must be paid to Subpart F income and GILTI income.

Do you have to file form 5471 if the entity you own is inactive or loses money?

Yes, mere ownership of the entity creates the filing obligation.

How do you file form 5471?

If you meet one of the categories of filers for the form 5471, you will need to complete the sections that are required of that specific category filer and attach it to your timely filed tax return. The form will be considered timely filed if it attached to your tax return which was timely filed including extensions. The form 5471 will need to be substantially complete to be considered timely.

If you fall into multiple category filer status, you need to file just one form 5471 per entity reporting all the information for each category you meet.

What happens if you don’t/didn’t file form 5471 or you file it late?

Failure to file form 5471 is subject to penalty. There is a monetary penalty of $10,000 for failure to file the form 5471. With this form, late filing is considered failure to file and subject to penalty. There is an additional $10,000 penalty for failure to file form 5471 Schedule O as well.

If you have not filed form 5471 and are required to do so you should contact our firm to discuss your options and the application of any penalties. We work with clients on their delinquent filings to assist with preventing or abating the penalty on late filings of form 5471.

Other considerations?

If you have a form 5471 filing obligation you may have other information reporting forms to file as well. Additional filings that may apply could be:

• Foreign Bank Account Reporting (FBAR)
• Form 8938 foreign financial asset reporting
• Form 8865 foreign partnership reporting
• Form 926 contributions to foreign corporations
• Form 8858 foreign branch and disregarded entity reporting
• Form 8992 GILTI reporting
• Form 8621 Passive Foreign Investment Company (PFIC) reporting

Updates on Form 5471

In recent years, there have been some updates to Form 5471 that are worth noting. The IRS has made revisions to the form and its instructions to ensure that they remain current and accurate. These changes are designed to make the form easier to understand and fill out, and to ensure that it accurately reflects the current tax laws and regulations.

One of the key updates is the revision of Form 5471 and its separate Schedules E, G-1, H, I-1, and M in December 2021. The separate Schedules J, P, Q, and R were revised in December 2020, and the separate Schedule O was revised in December 2012. These revisions are part of the IRS’s ongoing efforts to keep the form and its schedules up to date with the latest tax laws and regulations.

Another important update is the requirement to report all information in functional currency in accordance with U.S. generally accepted accounting principles (GAAP). Each amount must also be reported in U.S. dollars translated from functional currency using GAAP translation rules. This change is designed to ensure that all financial information reported on Form 5471 is accurate and consistent.

The IRS has also updated the instructions for Form 5471. These instructions provide detailed guidance on how to fill out the form and its schedules. They include information on who needs to file Form 5471, what information needs to be reported, and how to report it. The instructions also provide examples to help taxpayers understand how to fill out the form correctly.

It’s important to note that these updates are part of the IRS’s ongoing efforts to improve the tax filing process and ensure that all taxpayers are reporting their foreign investments accurately. If you’re a U.S. person with ownership in a foreign corporation, it’s crucial to stay up to date with these changes to ensure that you’re meeting your tax reporting obligations.