By Anthony Diosdi
U.S. persons with certain interests in controlled foreign corporations (“CFCs”) must disclose their interests on Form 5471. Sometimes, CFCs temporarily stop conducting business and as a result, the CFC’s U.S. shareholders assume that it is not necessary to file an IRS Form 5471. This is an incorrect assumption and can result in serious penalty assessments by the IRS. Even if a CFC is dormant, the U.S. shareholders must still file a Form 5471. The good news is shareholders of a dormant CFC can qualify for minimal Form 5471 reporting requirements. Revenue Procedure 92-70 discusses the circumstances when a CFC shareholder qualifies for minimal Form 5471 reporting requirements.
Per Revenue Procedure 92-70, there are eight conditions that must be met in order for a foreign corporation to be considered dormant and eligible for minimal reporting. According to Revenue Procedure 92-70, a CFC is dormant for reporting purposes if:
1. The foreign corporation conducted no business and owned no stock in any other corporation other than another dormant foreign corporation;
2. No shares of the foreign corporation (other than the directors’ qualifying shares) were sold, exchanged, redeemed, or otherwise transferred, nor was the foreign corporation a party to a reorganization;
3. No assets of the foreign corporation were sold, exchanged, redeemed, or otherwise transferred with the exception of de minimis transfers discussed below;
4. The foreign corporation received or accrued no more than $5,000 of gross income;
5. The foreign corporation paid or accrued no more than $5,000 of expenses;
6. The value of the foreign corporation’s assets pursuant to general accounting principles do not exceed $100,000;
7. No distributions were made by the foreign corporation; and
8. The foreign corporation either had no current or accumulated earnings and profits or had only de minimis changes in its accumulated earnings and profits balance sheet.
These rules are complicated. If you are a CFC shareholder, never assume that you qualify for minimal reporting requirements without discussing your matter with a qualified professional well versed in international taxation.
Anthony Diosdi is a partner and attorney at Diosdi Ching & Liu, LLP, located in San Francisco, California. Diosdi Ching & Liu, LLP also has offices in Pleasanton, California and Fort Lauderdale, Florida. Anthony Diosdi advises clients in tax matters domestically and internationally throughout the United States, Asia, Europe, Australia, Canada, and South America. Anthony Diosdi may be reached at (415) 318-3990 or by email: adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.