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Reporting Requirements for Interest in Foreign Corporations

A U.S. person may have international tax reporting obligations to the IRS if he or she owns more than 10% stock in a foreign corporation. The U.S. persons who might be subject to these special reporting rules include: 1) U.S. citizens or residents who serve as director or officers of the foreign corporation; 2) U.S. citizens or residents who acquire stock in the corporation and immediately have 10% ownership of the company’s stock; 3) a person who becomes a U.S. person while owning 10% of a foreign corporation’s stock.

In addition, any U.S. person who “controls” a foreign corporation is required to make a filing of informational return to the IRS. A U.S. person is defined for these purposes as U.S. citizens and residents, domestic corporations and partnerships, non-foreign decedent’s estates, and domestic trusts. As far as the timing of when a person acquires stock in the foreign corporation, the Internal Revenue Code states that the acquisition takes place when the person “has an unqualified right to receive such stock even though such stock is not actually issued.”

What Form Should I Use as a U.S. Person with Interest in a Foreign Corporation?

The IRS has designated Form 5471 as the required reporting form for U.S. Persons with interest in foreign corporations. Form 5471 is also supplemented with various schedules which the taxpayer must complete depending on their specific tax situation and the type of filer involved. Any taxpayer subject to the Form 5471 requirement must file that form at the same time that he or she files the income tax return.

Specific Form 5471 Rules for Different Taxpayers

Category 2 taxpayers include U.S. citizens and residents who are directors or officers in a foreign corporation. This class of taxpayers must file Form 5471 during a particular year if a U.S. person obtained stock of the foreign corporation amounting to at least 10 percent of the corporation’s stock, either by vote or by value.

Another category of taxpayers subject to the Form 5471 requirements are Category 3 taxpayers, which includes a U.S. person who does any of the following:

  1. acquires stock of the foreign corporation which then comprises at least 10 percent of the corporation’s outstanding stock by value or voting power;
  2. becomes a U.S. person at any point while owning 10 percent of the corporation’s outstanding stock;
  3. makes a disposition of stock that has the effect of reducing the person’s shareholdings below 10 percent by vote or by value.

Category 4 taxpayers subject to the Form 5471 requirement consist of any U.S. person who controlled a foreign corporation for a continuous period of at least 30 days during the annual accounting period of the corporation that ends within or with the U.S. person’s taxable year. A U.S. person is deemed to have “controlled” a foreign corporation if he or she owns more than 50 percent of the corporation’s stock, where ownership is determined by the constructive ownership rules of section 381(a).

Category 5 persons are any person who is a U.S. shareholder of a foreign corporation for a continuous period of at least 30 days during the corporation’s taxable year, and must maintain this status on the last day of the year in which the corporation was a controlled foreign corporation. For these purposes, a foreign corporation is considered to be a CFC if more than 50 percent of its stock, by vote or by value, is owned, directly, indirectly, and constructively, by U.S. shareholders. Any category 5 taxpayer must report general information about the corporation and its stock, as well as information about the corporation’s U.S. shareholders.

How a Tax Attorney Can Help

The rules governing Form 5471 reporting can be complicated. If you believe that you may qualify as a class of U.S. taxpayers required to file Form 5471 by virtue of your ownership in a foreign corporation, you should consult with a knowledgeable international tax attorney.

The Tax Lawyer - William D. Hartsock has been successfully helping clients with tax issues related to their foreign assets since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.

Resources:

  1. IRC § 6046(a). http://www.law.cornell.edu/uscode/text/26/6046
  2. IRC § 6038(a). http://www.ustransferpricing.com/NewFiles/S6038.html
  3. Instructions for Form 5471 at 1 (Dec. 2009). http://www.irs.gov/pub/irs-pdf/i5471.pdf
  4. IRC § 6038(a). http://www.irs.gov/Businesses/Corporations/Explanation-of-Section-6038D-Temporary-and-Proposed-Regulations
  5. IRC § 6038(e)(2); Reg. § 1.6038-2(c). http://www.irs.gov/irm/part20/irm_20-001-009.html
  6. IRC §§ 958(b), 957(a). http://www.gpo.gov/fdsys/pkg/USCODE-2011-title26/pdf/USCODE-2011-title26-subtitleA-chap1-subchapN-partIII-subpartF-sec957.pdf

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The Tax Lawyer - William D. Hartsock, Esq. – San Diego Tax Attorney

Author: William D. Hartsock, Esq

A "Certified Tax Law Specialist" for over 37 years, Mr. Hartsock is one of the most trusted and respected tax attorneys in Southern California. Call today to discuss the facts of your case and learn about your options. Mr. Hartsock offers free consultations and all conversations are protected under attorney-client privilege; meaning that no information shared with a tax attorney will be shared with the IRS or California Franchise Tax Board.