Are You Required to File Tax Form 5471?
U.S. citizens and residents who are officers, directors or shareholders in certain foreign corporations must file Form 5471 as part of their expat tax return. This form is officially called the Information Return of U.S. Persons with Respect to Certain Foreign Corporations.
If you are living abroad and operating a business from a foreign country, you must file a U.S. federal tax return if you own at least 10 percent of a foreign corporation, and your return must include Form 5471.
What Is a Controlled Foreign Corporation (CFC)?
A CFC is any foreign corporation in which U.S. shareholders own more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or 50 percent of the total value of stock of such corporation. (A U.S. shareholder is any U.S. person who owns or is deemed to own 10 percent or more of all classes of stock entitled to vote.)
A U.S. taxpayer who is a shareholder in a CFC must file Form 5471. In most cases, the form is an information disclosure. The information required to be disclosed depends on the category of the filer. Typical disclosures include information regarding the shareholders, classes and attributes of issued and outstanding stock, income statement, balance sheet, and current earnings and profits. All financial information must be in accordance with U.S. generally accepted accounting principles (GAAP).
Reporting the CFC’s Subpart F Income
If the CFC’s revenue consists of Subpart F income, a portion of that income may have to be recognized as a deemed dividend distribution on the taxpayer’s personal income tax return (Form 1040). The four major components of subpart F income are summarized as follows:
Foreign-Based Holding Company Income
Passive income such as dividends, interest, royalties, rents and annuities
Foreign-Based Company Sales Income
Income derived from the sale or purchase of personal property to (or from) a related person where the property is manufactured and sold outside the country of incorporation
Foreign-Based Company Service Income
Income from the performance of personal services by a CFC for or on behalf of a related person outside the country in which the CFC is organized
Income attributable to the issuing of any insurance or annuity contracts in connection with property in, liability arising out of activity in, or the lives or health of residents of a country other than the country in which the CFC is created or organized
A de minimis rule allows for the exclusion of all gross foreign-based company income (the second and third items above) and insurance income less than the lesser of 5 percent of gross income or $1 million. Conversely, a full inclusion of all CFC gross income as gross foreign-based company income and insurance income occurs if 70 percent of the CFC’s gross income is gross foreign-based company and insurance income.
Expenses directly related to and expenses allocated and apportioned to subpart F income may be deducted against subpart F income. In addition, the U.S. shareholder’s pro rata share of earnings and profits previously included in gross income and current year distributions reduces total subpart F income.
If the foreign corporation is determined to be a CFC for an uninterrupted period of 30 days (determined each year), and it is determined that a CFC has subpart F income, then a U.S. shareholder must include a deemed distribution in his or her gross income. A U.S. shareholder who owns stock in a foreign corporation on the last day of the taxable year during which the corporation is a CFC is treated as receiving a deemed dividend from the CFC equal to the shareholder’s pro rata share of the subpart F income computed as follows (assuming one class of issued stock):
Pro rata share of subpart F income to U.S. shareholder = percent of stock owned at year end x Subpart F income x number of days the corporation was a CFC/total number of days in the year
The deemed divided is reported on the U.S. shareholder’s individual or entity return, as applicable. A copy of the Form 5471 must also be attached to the shareholder’s U.S. tax return.
How Expat CPA Can Help
The above is a general outline of the CFC rules and is by no means comprehensive. We hope this outline is helpful in providing our clients with a general understanding of this complex area of the tax code. We look forward to providing you with tax consulting and compliance services regarding your specific facts and circumstances.
- Simple Form 5471: $600
- For more complex forms, an hourly rate will be charged.