The Category 1, 2,3,4, and 5 Form 5471 Filers Explained

Category 1, 2,3,4, and 5 Form 5471 Filers

Category 1, 2,3,4, and 5 Form 5471 Filers 

While there are many different types of international information reporting forms that US persons (including expats) may have to file each year to report their foreign accounts, assets, investments, and income to the IRS – Form 5471 is one of the more common, along with being one of the more complex. Form 5471 is used to report ownership in a foreign corporation. The form ranges from mildly annoying to incredibly complex, depending on whether the corporation is considered a CFC (Controlled Foreign Corporation). If the corporation is considered a CFC, then other issues such as GILTI (Global Intangible Low-Taxed Income) and Subpart F Income issues may rear their ugly head. Likewise, the failure to file the form (substantially complete) may result in significant fines and penalties – although there are various international tax amnesty programs that may avoid or abate (remove) these penalties. Let’s look at the different categories of filers.

Categories of Filers “1” (U.S. Shareholders)

The Category 1 filer is a common filer. It primarily relates to shareholders of foreign corporations who meet the threshold requirements for filing.

• • • “This category includes a U.S. shareholder of a foreign corporation that is a section 965 specified foreign corporation (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. U.S. shareholder.

    • For purposes of Category 1, a U.S. shareholder is a U.S. person who owns (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) 10% or more of the total combined voting power of all classes of voting stock of an SFC or, in the case of a tax year of a foreign corporation beginning after December 31, 2017, 10% or more of the total combined voting power or value of shares of all classes of stock of an SFC. U.S. person. See Category 5 Filer, later, for definition.

    • Section 965 specified foreign corporation (SFC). For purposes of Category 1, an SFC (as defined in section 965) is:

      • A CFC (see Category 5 Filer, later, for a definition), or

      • Any foreign corporation with respect to which one or more domestic corporations is a U.S. shareholder.

    • However, if a passive foreign investment company (as defined in section 1297) with respect to the shareholder is not a CFC, then such corporation is not an SFC. See section 965 and the regulations thereunder for exceptions.

    • Note. A U.S. shareholder who is a Category 1 filer (defined above) must continue to file all information required of a Category 1 filer as long as:

      • The section 965 specified foreign corporation has accumulated E&P related to section 965 that is reportable on Schedule J (Form 5471), or

      • The U.S. shareholder has previously taxed E&P related to section 965 that is reportable on Schedule P (Form 965).”

Important Practice Tip for Category 1

The IRS carved out an exception for foreign corporations that are PFIC but not CFC to the particular shareholder.  If the Foreign PFIC is not a CFC, then the PFIC does not qualify as a 965 Corporation.

Categories of Filers “2” (Officer or Director with U.S. Person Investor)

The Category 2 filer is also relatively common. It primarily relates to shareholders of foreign corporations who are officers or directors in a foreign corporation in which a U.S. person has an ownership of the company. It is important to note that oftentimes category 2 and 3 filers do not have an ‘ongoing’ Form 5471 filing requirement and can usually transition to Form 8938 reporting — which is simpler.

• • • “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):

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

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

    • A U.S. person has acquired stock in a foreign corporation when that person has an unqualified right to receive the stock, even though the stock is not actually issued. See Regulations section 1.6046-1(f)(1) for more details. 10% 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 with voting 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 as defined in section 7701(a)(31). See Regulations section 1.6046-1(f)(3) for exceptions.”

Categories of Filers “3” (Additional Acquisition of Stock)

“This category includes:

• • • 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.”

Important Practice Tip for Category 3

Bullet point 4 above is very important.  That is because it is a common misconception for foreigners who become U.S. person and already have an interest in a foreign corporation that they are not required to file Form 5471 – but that can be false (depending on the value of the ownership) and lead to them having to file the Form 5471.

Categories of Filers “4” (Control Test)

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. U.S. person.

“For purposes of Category 4, a U.S. person is:

• • • A citizen or resident of the United States;

    • A nonresident alien for whom an election is in effect under section 6013(g) to be treated as a resident of the United States;

    • An individual for whom an election is in effect under section 6013(h), relating to nonresident aliens who become residents of the United States during the tax year and are married at the close of the tax year to a citizen or resident of the United States;

    • A domestic partnership;

    • A domestic corporation; and

    • An estate or trust that is not a foreign estate or trust as defined in section 7701(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 during that person’s tax year, it owns stock possessing:

• • • More than 50% of the total combined voting power of all classes of stock of the foreign corporation entitled to vote, or

    • More than 50% of the total value of shares of all classes of stock of the foreign corporation. A person in control of a corporation that, in turn, owns more than 50% of the combined 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 C owns 51% of the voting stock in Corporation D. Therefore, Corporation D is controlled by Corporation A.

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

Categories of Filers “5” (CFC – Controlled Foreign Corporation)

• • • This category includes 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.

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

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

      • Owns (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) 10% or more of the total combined voting power of all classes of voting stock of a CFC or, in the case of a tax year of a foreign corporation beginning after December 31, 2017, 10% or more of the total combined voting power or value of shares of all classes of stock of a CFC; or

      • Owns (either directly or indirectly, within the meaning of section 958(a)) any stock of a CFC (as defined in sections 953(c)(1)(B) and 957(b)) that also is a captive insurance company. U.S. person.

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

    • A citizen or resident of the United States,

    • A domestic partnership,

    • A domestic corporation, and

    • An estate or trust that is not a foreign estate or trust as defined in section 7701(a)(31). See section 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)) on any day of the tax year of the foreign corporation, more than 50% of:

    • • The total combined voting power of all classes of its voting stock, or

      • The total value of the stock of the corporation.

Rev. Proc. 2019-40 

Certain Category 1 and Category 5 Filers may qualify for relief for certain types of Category 5 filers under Rev. Proc 2019-40

These instructions clarify that this relief is extended to similarly-situated Category 1 filers.

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