Triggers for Form 5471 (6038 & 6046) Filing
When it comes to international tax reporting, the Internal Revenue Service has various forms that a US Taxpayer may have to file in order to be compliant with all the different international tax requirements. As we have written about extensively, Form 5471 — which is used to report foreign corporations — is one of the most complicated of the various international tax forms. That is because oftentimes, taxpayers who own smaller foreign corporations such as a Canadian Corporation or Sociedad Anonima are not used to this type of reporting. This is especially true when, under the foreign country’s tax laws, the reporting may be much more limited. Especially in a situation in which a foreign corporation is considered a per se corporation under US Tax Law — amd therefore cannot be disregarded. Sometimes, the Form 5471 reporting requirements may sneak up on taxpayers. Here are five examples of form 5471 filing triggers.
Became a US Person
In any year that the Taxpayer becomes a US person — and at that time they own more than 10% of a foreign corporation –– even if it is not a controlled foreign corporation (CFC) –– they may be required to file a Form 5471. The idea behind the requirement, is that once a person becomes a US person and has this type of foreign entity ownership, for US tax purposes it is equivalent to that person acquiring that ownership in the year the person becomes a US person.
Created a New Foreign Company
With the globalization of the economy, it is not uncommon for a US taxpayer to have one or more small companies, private limited, companies, or Sociedad Anonimas while being a US Person. Depending on the type and level of ownership the US person has, it may result in limited or very extensive reporting – – the latter situation occurs most commonly when the person is in control of a CFC (aka has more than 50% ownership) — noting, attribution rules do apply.
Control of a CFC
A controlled foreign corporation is when a foreign corporation is owned more than 50% by US persons who typically own at least 10% share of the foreign company. Out of the five different categories of reporting, this category (4) type of filer will have the most complex and detailed filing requirements out of all the different categories. One thing to keep in mind is that a 50% ownership is not sufficient to be a controlled foreign corporation; rather, it must be more than 50%.
Acquire More than 10% Ownership in a Family Foreign Corporation
This is also a very common situation. A US Taxpayer may have parents or other family members that may be getting on in age. Therefore, the owners of the company may relinquish or transfer shares to the US person, which now places the taxpayer over the 10% threshold. As a result, while the taxpayer may not have any requirements in the foreign country where the corporation is located, they may have several requirements in accordance with Form 5471.
Let’s say you’ve had enough of filing Form 5471 so you decide to give up your ownership percentage in the foreign corporation. In any year that a Taxpayer relinquishes ownership or fall below the 10% threshold, they may also have to file a Form 5471.
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