Demystifying Form 5471 Schedule E and E-1 Used to Report and Track Foreign Tax Credits of Controlled Foreign Corporations

Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) is used by certain U.S. persons who are officers, directors, or shareholders in respect of certain foreign entities that are classified as corporations for U.S. tax purposes. Form 5471 and its schedules are used to satisfy the reporting requirements of Internal Revenue Code Sections 6038 and 6046.

Substantively, Form 5471 backstops various international sections of the Internal Revenue Code, including Sections 901 and 904 (foreign tax credits), Section 951(a) (subpart F income), Section 951A (global intangible low-taxed income or “GILTI”), Section 965 (one-time transition tax on a U.S. shareholder’s deferred foreign income), and Section 482 (transfer pricing). Other forms associated with Form 5471 include Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation), Form 5713 (International Boycott Report), Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund), and Forms 1116 and 1118 (Foreign Tax Credit).

Form 5471 includes 12 schedules. This article discusses the Schedule E and E-1 of Form 5471. These schedules are used to track a foreign corporation’s foreign tax credits.

Key Terms for Form 5471

Form 5471 provides for five general categories of filers, numbered 1 through 5. Two of these general categories are subdivided into three subtypes each, with each subtype being a separate filer category as well. The filer category that a taxpayer falls under dictates the schedule or schedules that the taxpayer must include with the form. In order to understand how these filer categories work, it is helpful to review some basic terms.

U.S. Person

Only U.S. persons who own stock in a foreign corporation can have a Form 5471 filing obligation. A U.S. person is generally a citizen or resident of the United States, a domestic partnership, a domestic corporation, or a domestic trust or estate, each as defined in Internal Revenue Code Section 7701(a)(30)(A) through (E). A tax-exempt U.S. entity may have a Form 5471 filing obligation. In addition, an individual who relies on the residency provision of an income tax treaty to reduce his or her U.S. income tax liability (and files Form 8833) remains a U.S. person for purposes of Form 5471. See Treas. Reg. Section 301.7701(b)-7(a)(3). There are some slight modifications to the definition of a U.S. person which will be discussed in more detail below. All of the Form 5471 filer categories apply to U.S. persons.

U.S. Shareholder

Internal Revenue Code Section 951(b) defines a “U.S. shareholder” as a U.S. citizen, resident alien, corporation, partnership, trust, or estate that owns 10 percent or more of the total combined voting power of all classes of voting stock of a foreign corporation, or 10 percent or more of the total value of all the outstanding stock of a foreign corporation. All forms of stock ownership, — i.e., direct, indirect (ownership through intervening entities), and constructive (attribution of ownership from one related party to another) — are considered in applying the 10 percent test.

Controlled Foreign Corporation (“CFC”)

A foreign corporation is a CFC if, on any day during its taxable year, all of its U.S. shareholders, taken together as a group, own more than 50 percent of the combined voting power of all classes of the foreign corporation’s voting stock, or more than 50 percent of the total value of all of the foreign corporation’s outstanding stock. See IRC Section 957(a). Only U.S. persons who constitute U.S. shareholders are considered in applying the 50 percent test. Just as in the case of the 10 percent test for determining whether a U.S. person is a U.S. shareholder, direct, indirect, and constructive ownership of stock are all considered in applying the 50 percent test for CFCs. The term “foreign,” when applied to a corporation, means a corporation that is not domestic — i.e., a corporation that is not incorporated in a U.S. state or the District of Columbia. See IRC Section 7701(a)(5).

Treasury Regulations 301.7701-2(b)(8) provides a list of foreign entities that are conclusively treated as “per se” corporations for U.S. tax purposes. An individual preparing a Form 5471 should be aware that abbreviations in an entity name such as “Ltd.” and “S.A.” do not always stand for “Limited” or “Sociedad Anonima” (or “Societe Anonyme”). The preparer should confirm what the unabbreviated terms are, preferably from a charter or other official document from the relevant jurisdiction. If a foreign entity is not in the list of per se corporations, Treasury Regulations Section 301.7701-3(b)(2) provides that, unless a contrary election is made, the foreign entity will be treated as (1) an association taxable as a corporation if all its members have limited liability, (2) a partnership it it has two or more members (at least one of which does not have limited liability), or (3) a disregarded entity if it has a single owner who does not have limited liability.

Section 965 Specified Foreign Corporation (“SFC”)

An SFC is a foreign corporation that either is a CFC or has at least one U.S. shareholder that is a domestic corporation. See IRC Section 965(e)(1). The term SFC includes not only CFCs, but also entities commonly referred to as “10/50 corporations.” These foreign corporations have at least one U.S. shareholder, but are not CFCs because U.S. shareholders do not collectively own more than 50 percent of the corporation’s stock either by vote or value.

Stock Ownership

For purposes of Form 5471, a U.S. person can own stock in a corporation in three possible ways. First, the person can own the stock “directly.” For example, owning stock in a brokerage account constitutes direct ownership of the stock. Second, the U.S. person can own the stock “indirectly” through an intervening entity, such as a corporation, partnership, estate, or trust, in which the U.S. person owns an interest. In these cases, the stock owned by the intervening entity is typically considered to be owned proportionately by its shareholders, partners, or beneficiaries, as the case may be. For example, if a U.S. person directly owns 40 percent of the stock of a corporation and that corporation, in turn, directly owns 50 percent of the stock of a second corporation, then the U.S. person is considered to own indirectly 20 percent (i.e., 40% × 50%) of the stock of the second corporation. Indirect stock ownership can extend through several layers of intervening entities, where each intervening entity directly owns an interest in the one immediately below it. The third way that a U.S. person can own stock is by “constructively” owning the stock due to a relationship with another person. This relationship most commonly involves family members. For example, if a U.S. citizen mother directly owns 6 percent of a corporation’s stock and her U.S. citizen daughter directly owns 5 percent of the same corporation’s stock, then each of them is considered to own constructively the shares of the other. As a result, the mother and daughter are each considered to own 11 percent of the corporation’s stock. Another less common relationship involves sister entities. This form of constructive ownership (referred to as downward attribution) arises when an individual or entity parent directly or indirectly owns stock in a corporation and, at the same time, owns an interest in another entity. Under downward attribution, the corporation’s stock that the parent owns is attributed downward from the parent to the second entity. As a result, the second entity is considered to own constructively the same stock owned by the parent. Generally, the stock that is owned constructively by one person due to family or downward attribution cannot be further owned constructively by another.

All three kinds of stock ownership apply when determining which Form 5471 filer category or categories a taxpayer falls under, but there are variations among the categories. For example, in Categories 2 and 3, constructive family ownership includes attribution of stock from siblings, grandparents, and nonresident aliens, whereas the other three categories do not allow for these attributions. Categories 1, 4, and 5 define indirect ownership to mean only indirect ownership through foreign intervening entities, and include indirect ownership through intervening U.S. entities as constructive upward attribution. Categories 2 and 3 specifically provide for indirect ownership, but only through entities that are foreign corporations or partnerships, and refer to this type of non-direct ownership as both indirect and constructive ownership. Constructive ownership in the form of downward attribution does not exist in Categories 2 and 3, but exists in Categories 1, 4, and 5. Category 4’s version of downward attribution prohibits attribution of stock from a foreign entity to a U.S. person. Category 1 and 5’s version, however, contains no such prohibition due to the Tax Cuts and Jobs Act of 2017 (the “TCJA”). All these variations, as well as others not described above, will need to be taken into account when preparing a Form 5471.

Filer Categories

Form 5471, together with its applicable schedules, must be completed (to the extent required on the form) and filed by the taxpayer according to the taxpayer’s filer category. What follows is a description of each filer category.

Category 1 Filer

A Category 1 filer is a U.S. shareholder of a foreign corporation that is an SFC at any time during the corporation’s taxable year. However, to be classified as a Category 1 filer, the U.S. shareholder of the SFC must also own the SFC’s stock on the last day of the SFC’s taxable year.

The stock ownership rules applicable to Category 1 (including Categories 1a, 1b, and 1c) are contained in Internal Revenue Code Section 958, which incorporates and modifies the constructive stock ownership rules of Section 318(a). For Category 1 purposes, if a person does not directly own stock, the person can own stock as follows:

• Indirect stock ownership through an intervening entity. The intervening entity (i.e., a corporation, partnership, estate, or trust) can only be a foreign entity. The person, who is to become the indirect owner of stock through the intervening entity, is not required to hold a minimum ownership interest (i.e., stock, partnership interest, or beneficial interest) in the intervening foreign entity.
• Constructive stock ownership from another person.
  • Attribution from family members. A person can only be attributed stock owned by his or her parent, spouse, child, or grandchild. However, no attribution is permitted from a nonresident alien to a U.S. citizen or resident.
  • Upward attribution from entities. The attributing entity can be either a U.S. or foreign entity. However, if the attributing entity is a corporation, the person to whom the stock is to be attributed must own at least 10 percent (by value) of the attributing entity’s stock. Furthermore, if the stock to be attributed upward constitutes more than 50 percent of a corporation’s voting stock, then the stock is deemed to constitute 100% of the corporation’s voting stock when it gets proportionately allocated among the attributing entity’s owners.
  • Downward attribution from persons. The attributing person can be either an individual or entity. However, if the stock is to be attributed downward to a corporation, the attributing person must own at least 50 percent (by value) of that corporation’s stock.

Category 1a, 1b, and 1c Filers

Category 1 is subdivided into Categories 1a, 1b, and 1c. Category 1a is a catchall category and applies to Category 1 filers who do not otherwise fall under either Category 1b or 1c. Categories 1b and 1c were added to Form 5471 as the result of Revenue Procedure 2019-40, which the IRS issued in response to the repeal of provisions in Section 958(b) that previously disapplied the constructive downward attribution rules of Section 318(a)(3) to the extent that they attributed stock owned by a foreign person to a U.S. person.

Categories 1b and 1c specifically apply to those SFCs that are considered to be foreign-controlled for purposes of Form 5471. Such an SFC, referred to herein as a “Foreign-Controlled SFC,” is a foreign corporation that, although classified as an SFC, would not be so classified if the determination were made without applying Section 318(a)(3)’s downward attribution rules so as to consider a U.S. person as owning the stock owned by a foreign person.

A Category 1b filer is a U.S. shareholder who owns, directly or indirectly under Section 958(a) (but not constructively under Section 958(b)), the stock of a Foreign-Controlled SFC and is not related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled SFC. Section 954(d)(3) defines two persons as being “related” to each other in terms of “control,” where one person controls or is controlled by the other, or is controlled by the same person or persons who control the other. Here, control over a corporation means directly or indirectly owning more than 50 percent of the corporation’s stock by either vote or value. A Category 1b filer is typically a shareholder who owns, directly or indirectly, stock in a foreign corporation but is not related to the foreign corporation because the common parent of both the shareholder and the foreign corporation does not control the foreign corporation.

A Category 1c filer is a U.S. shareholder who does not own, either directly or indirectly, the stock of a Foreign-Controlled SFC but is related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled SFC. A Category 1c filer is typically a shareholder that owns the stock of a foreign corporation only because of constructive stock ownership under Section 318(a)(3) and the shareholder is related to the foreign corporation because each of them is under the control of a common parent.
A U.S. shareholder who does not own, either directly or indirectly, the stock of a Foreign-Controlled SFC and is not related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled SFC, is neither a Category 1b nor 1c filer. Such U.S. shareholder is deemed not to fall under the Category 1a catchall and is exempt from the obligation to file Form 5471.

Category 2 Filer

A Category 2 filer is a U.S. person who is an officer or director of a foreign corporation in which there has been a substantial change in its U.S. ownership. A U.S. person can be a Category 2 filer even if the change relates to stock owned by another U.S. person and regardless of whether or not that other U.S. person is an officer or director of the foreign corporation. For Category 2 purposes, a U.S. person is defined as a U.S. citizen, resident alien, corporation, partnership, estate, or trust. However, Category 2 also expands the definition of a U.S. person to include a bona fide Puerto Rico resident, a bona fide possessions resident, and a nonresident alien as to whom a Section 6013(g) or (h) election is in effect (i.e., where a nonresident alien spouse has made an election to be taxed as a U.S. person). In regard to the definition of an officer or director, there is no clear answer as to what constitutes an officer or director for purposes of a Category 2 filer. Treasury Regulations Section 1.6046-1(d) provides that “persons who would qualify by the nature of their functions and ownership in such associations, etc., as officers, directors, or shareholders thereof will be treated as such for purposes of this section without regard to their designations under local law.”

For purposes of Category 2, a substantial change in U.S. ownership in a foreign corporation occurs when any U.S. person (not necessarily the U.S. citizen or resident who is the officer or director) either (1) acquires stock that causes that U.S. person to own a 10 percent block of stock in that foreign corporation (by vote or value) or (2) acquires an additional 10 percent block of stock in that corporation (by vote or value). More precisely, if any U.S. person acquires stock that, when added to any stock previously owned by that U.S. person, causes the U.S. person to own stock meeting the 10 percent stock ownership requirement, the U.S. officers and directors of that foreign corporation must report. A disposition of shares in a foreign corporation by a U.S. person, however, does not create filing obligations under Category 2 for U.S. officers and directors of that foreign corporation.

The stock ownership rules applicable to Category 2 are contained in Internal Revenue Code Section 6046(c) and Treasury Regulations Section 1.6046-1(i). For Category 2 purposes, if a person does not directly own stock, the person can own stock as follows:

• Constructive stock ownership from another person.
  • Attribution from family members. A person can only be attributed stock owned by his or her brother, sister, spouse, ancestors, and lineal descendants. Attribution from nonresident aliens is permitted.
  • Upward attribution from entities. The attributing entity can be either a foreign corporation or a foreign partnership. The person, who is to become the constructive/indirect owner of stock through the attributing foreign corporation or partnership, is not required to hold a minimum ownership interest (i.e., stock or partnership interest) in the attributing foreign corporation or partnership. By negative implication, there is no attribution of stock from U.S. entities, or from foreign estates or trusts. Nevertheless, stock owned by U.S. entities that are not treated as entities separate from their owners for U.S. income tax purposes (i.e., grantor trusts and disregarded entities) should be attributable to their owners.

Category 3 Filer

A U.S. person who owns stock in a foreign corporation is a Category 3 filer if any one of the following events occurs during the taxable year:

1.  The U.S. person acquires stock in the corporation that, when added to any stock already owned by the person, causes the person to own at least 10 percent (by vote or value) of the corporation’s stock.
2. The U.S. person acquires stock that, without regard to any stock already owned by the person, constitutes at least 10 percent (by vote or value) of the corporation’s stock.
3. The U.S. person becomes a U.S. person while owning at least 10 percent (by vote or value) of the corporation’s stock.
4. The U.S. person disposes of sufficient stock in the corporation to reduce the person’s interest to less than 10 percent (by vote or value) of the corporation’s stock.
5. The U.S. person owns at least 10 percent (by vote or value) of the corporation’s stock when the corporation is reorganized.

For Category 3 purposes, a U.S. person is defined as a U.S. citizen, resident alien, corporation, partnership, estate, or trust. However, Category 3 also expands the definition of a U.S. person to include a bona fide Puerto Rico resident, a bona fide possessions resident, and a nonresident alien as to whom a Section 6013(g) or (h) election is in effect (i.e., where a nonresident alien spouse has made an election to be taxed as a U.S. person).

The stock ownership rules applicable to Category 3 are the same as the ones applicable to Category 2, as described above under “Filer Categories–Category 2 Filer.” These rules are contained in Internal Revenue Code Section 6046(c) and Treasury Regulations Section 1.6046-1(i).

Category 4 Filer

A U.S. person is a Category 4 filer with respect to a foreign corporation for a taxable year if the U.S. person controls the foreign corporation. For Category 4 purposes, a U.S. person is defined as a U.S. citizen, resident alien, corporation, partnership, estate, or trust. However, Category 4 also expands the definition of a U.S. person to include a bona fide Puerto Rico resident, a bona fide possessions resident, and a nonresident alien as to whom a Section 6013(g) or (h) election is in effect (i.e., where a nonresident alien spouse has made an election to be taxed as a U.S. person). See Treas. Reg. Section 1.6038-2(d).

A U.S. person is considered to “control” a foreign corporation for purposes of Category 4 if at any time during the person’s taxable year, such person owns more than 50 percent of the combined voting power of all classes of the foreign corporation’s voting stock, or more than 50 percent of the total value of all of the foreign corporation’s outstanding stock. See IRC Section 6038(e)(2). It is important to note that the concept of control here for Category 4 filers is distinct from the one in the definition of CFC, a term used for Category 1 and Category 5 filers. There, control over a foreign corporation exists when more than 50 percent (by vote or value) of the corporation’s stock is owned by one or more U.S. shareholders, each of whom individually owns at least 10 percent of the corporation’s stock. By contrast, a Category 4 filer is a single U.S. person who individually owns more than 50 percent (by vote or value) of the foreign corporation’s stock.

The stock ownership rules applicable to Category 4 are contained in Internal Revenue Code Section 6038(e)(2), which incorporates and modifies the constructive stock ownership rules of Section 318(a). For Category 4 purposes, if a person does not directly own stock, the person can own stock as follows:

• Constructive stock ownership from another person.
  • Attribution from family members. A person can only be attributed stock owned by his or her parent, spouse, child, or grandchild. Attribution from nonresident aliens is permitted.
  • Upward attribution from entities. The attributing entity can be either a U.S. or foreign entity. However, if the attributing entity is a corporation, the person to whom the stock is to be attributed must own at least 10 percent (by value) of the attributing entity’s stock. Furthermore, because Section 6038(e)(2) defines control for purposes of Category 5 as owning more than 50% (by vote or value) of a corporation’s stock, if a person controls a corporation that, in turn, owns more than 50% (by vote or value) of the stock of a second corporation, then such person will be treated as in control of the second corporation as well.
  • Downward attribution from persons. The attributing person can be either an individual or entity. However, if the stock is to be attributed downward to a corporation, the attributing person must own at least 50 percent (by value) of that corporation’s stock. Furthermore, no downward attribution is allowed if it results in a U.S. person constructively owning stock that is owned by a foreign person (as the attributing person).

Category 5 Filer

A Category 5 filer is a U.S. shareholder of a foreign corporation that is a CFC at any time during the corporation’s taxable year. However, to be classified as a Category 5 filer, the U.S. shareholder of the CFC must also own the CFC’s stock on the last day of the CFC’s taxable year.

The stock ownership rules applicable to Category 5 (including Categories 5a, 5b, and 5c) are the same as the ones applicable to Category 1 (including Categories 1a, 1b, and 1c), as described above under “Filer Categories–Category 1 Filer.” These rules are contained in Internal Revenue Code Section 958, which incorporates and modifies the constructive stock ownership rules of Section 318(a).

Category 5a, 5b, and 5c Filers

Category 5 is subdivided into Categories 5a, 5b, and 5c. Category 5a is a catchall category and applies to Category 5 filers who do not otherwise fall under either Category 5b or 5c. Categories 5b and 5c were added to Form 5471 as the result of Revenue Procedure 2019-40, which the IRS issued in response to the repeal of provisions in Section 958(b) that previously disapplied the constructive downward attribution rules of Section 318(a)(3) to the extent that they attributed stock owned by a foreign person to a U.S. person.

Categories 5b and 5c specifically apply to those CFCs that are considered to be foreign-controlled for purposes of Form 5471. Such a CFC, referred to herein as a “Foreign-Controlled CFC,” is a foreign corporation that, although classified as a CFC, would not be so classified if the determination were made without applying Section 318(a)(3)’s downward attribution rules so as to consider a U.S. person as owning the stock owned by a foreign person.

A Category 5b filer is a U.S. shareholder who owns, directly or indirectly under Section 958(a) (but not constructively under Section 958(b)), the stock of a Foreign-Controlled CFC and is not related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled CFC. Section 954(d)(3) defines two persons as being “related” to each other in terms of “control,” where one person controls or is controlled by the other, or is controlled by the same person or persons who control the other. Here, control over a corporation means directly or indirectly owning more than 50 percent of the corporation’s stock by either vote or value. A Category 5b filer is typically a shareholder who owns, directly or indirectly, stock in a foreign corporation but is not related to the foreign corporation because the common parent of both the shareholder and the foreign corporation does not control the foreign corporation.

A Category 5c filer is a U.S. shareholder who does not own, either directly or indirectly, the stock of a Foreign-Controlled CFC but is related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled CFC. A Category 5c filer is typically a shareholder that owns the stock of a foreign corporation only because of constructive stock ownership under Section 318(a)(3) and the shareholder is related to the foreign corporation because each of them is under the control of a common parent.

A U.S. shareholder who does not own, either directly or indirectly, the stock of a Foreign-Controlled CFC and is not related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled CFC, is neither a Category 5b nor 5c filer. Such U.S. shareholder is deemed not to fall under the Category 5a catchall and is exempt from the obligation to file Form 5471.

Why Category of Filers Matter

The filer category determines the Form 5471 schedule required to be attached to the Form 5471. In particular, Filer categories 1, 1b, 1c, 4, 5a, 5b, and 5c are required to file Schedule E. Filer categories 1a, 1b, 4, 5a, and 5b are required to file Schedule E-1.

Schedule E

Schedule E begins by asking the filer to complete Lines a and b of the Schedule. Line a requires the filer to determine the category of foreign source income applicable to the income in question and to enter its corresponding code. To do this, the filer refers to the instructions for IRS Form 1118 (Foreign Tax Credit–Corporations), which provide for the following nine income categories:

Code Category of Foreign Source Income
951A Section 951A Category Income
FB Foreign Branch Category Income
PAS Passive Category Income
901j Section 901(j) Income
RBT PAS U.S. Source Passive Category Income Resourced by Treaty as Foreign Source Passive Category Income
RBT GEN U.S. Source General Category Income Resourced by Treaty as Foreign Source General Category Income
RBT FB U.S. Source Foreign Branch Income Resourced by Treaty as Foreign Source Foreign Branch Category Income
RBT 951A U.S. Source Section 951A Category Income Resourced by Treaty as Foreign Source Section 951A Category Income
GEN General Category Income

Section 951A Category Income

Section 951A category income is any amount of GILTI includible in gross income under Section 951A (other than passive category income). A separate Schedule J, however, should not be completed for any Section 951A category income. Reclassified Section 951A PTEP and Section 951A PTEP in the Section 951A category should instead be reported on the Schedule E and E-1 for general category income.

Foreign Branch Category Income

Foreign branch income is defined under Section 904(d)(2)(J)(i) as the business profits of a U.S. person which are attributable to one or more qualified business units (“QBUs”) in one or more foreign countries.

Passive Category Income

Passive income is generally the following:

1. Any income received or accrued that would be foreign personal holding company income (“FPHCI,” as defined in Section 954(c)) if the corporation were a CFC. This income includes any gain on the sale or exchange of stock that is more than the amount treated as a dividend under Section 1248.
2. Any amount includible in gross income under Section 1293, which relates to certain passive foreign investment companies (“PFICs”).

Passive income generally excludes certain types of income, such as export financing interest (see IRC Section 904(d)(2)(G) and Treas. Regs. Section 1.904-4(h)(3)), high-taxed income (see Treas. Regs. Section 1.904-4(c)), and active rents or royalties (see Treas. Regs. Section 1.904-4(b)(2)(iii)).

Section 901(j) Income

Section 901(j) income is income that is earned from a country sanctioned by the U.S. If Code “901j” is entered on Line a of the schedule, the two-letter country code for the sanctioned country (obtained from IRS.gov/countrycodes) must be entered on Line b.

Income Re-Sourced by Treaty

Certain U.S. income tax treaties provide a “resourcing” rule, under which a U.S. taxpayer may treat as foreign source any income that the other contracting state may tax under the treaty.

If a sourcing rule in a treaty treats any U.S. source income as foreign source, and the CFC elects to apply the treaty, the income will be treated as foreign source for U.S. tax purposes. Any U.S. source income that is so reclassified falls under this category and is to be broken out and coded as follows:

• “RBT PAS” for passive category income
• “RBT GEN” for general category income
• “RBT FB” for foreign branch category income
• “RBT 951A” for Section 951A (i.e., GILTI) category income

General Category Income

The general category income includes all income not described in one of the above categories.

Aggregated Schedule E

If multiple Schedules E are completed for a CFC, the filer must complete an additional Schedule E using the code “TOTAL” that aggregates all amounts listed in each line and column of all the other Schedules E for that CFC

Part 1. Taxes for Which a Foreign Tax Credit is Allowed

Section 1 – Taxes Paid or Accrued Directly by Foreign Corporation

Schedule 1 is designed to report any foreign taxes paid or accrued directly by a CFC. The filer must not only disclose the amounts of foreign taxes paid by the CFC, the filer must also properly convert the foreign taxes paid to U.S. dollars.

Column (a)

Column (a) asks the filer to list the name of the foreign corporation or pass-through entity (partnership or disregarded entity) that paid the foreign tax.

Column (b)

Column (b) asks the filer to enter the employer identification number (“EIN”) or reference ID number of the payor of the foreign tax.

Column (c)

Column (c) asks the filer to check the box if there are unsuspended taxes. The filer should check the box if the foreign income taxes were paid or accrued by the foreign corporation during the prior tax years and were suspended due to the applicable rules of Section 909 (Under Section 909, where there is a “foreign tax credit splitting event” with respect to foreign income tax paid or accrued by the taxpayer, the foreign income tax is not taken into account for U.S. tax purposes before the tax year in which the related income is taken into account by the taxpayer) and that were unsuspended in the current year because related income was taken into account by the foreign corporation, certain U.S. corporate owners of the foreign corporation, or a member of such U.S. corporate owner’s consolidated group.

Column (d)

Column (d) asks the filer to enter the two-letter codes of the foreign country the foreign tax was paid. Country Codes are available at irs.gov/countrycodes.gov. If taxes were paid or accrued to more than one country with respect to the same income, the filer should include an attachment listing applicable countries.

Column (e)

Column (e) asks the filer to disclose any tax accounting timing discrepancies between the U.S. and foreign tax years. For example, the foreign tax year under foreign law may not be the same as the U.S. tax year of the foreign corporation.

Column (g)

Column (g) asks the filer to enter the income subject to tax in the foreign jurisdiction of the corporation.

Column (h)

Column (h) asks the filer to check the applicable boxes if taxes are paid on U.S. source income.

Column (i)

Column (i) asks the filer to enter the three-letter currency code for the local currency in which the tax is payable.

Column (j)

Column (j) asks the filer to enter the tax paid or accrued in the local currency in which the tax is payable.

Column (k)

Column (k) ask the filer to enter the exchange rate in column (j) and the translated dollar amount in column (k). The filer should translate the taxes entered in column (f) into dollars at the average exchange rate for the tax year to which the tax relates unless one of the exceptions below applies:

1. The tax is paid before the beginning of the year to which the tax relates;

2. The accrued taxes are not paid before the date of two years after the close of the tax year to which such taxes relate;

3. There is an election in effect under Section 986(a)(1)(D) to translate foreign taxes using the exchange rate in effect on the date of payment; or

4. The CFC reports on a cash basis, the exchange rate must be reported using the “divide-by conversion rate” (in other words, the units of foreign currency that equals one unit foreign currency).

Column (m)

Column (m) asks the filer to enter the foreign tax in functional currency. Section 985(b)(1)(A) states the general rule that the functional currency will be “the dollar.” However, the functional currency of a QBU will be “the currency of the economic environment in which a significant part of such a unit’s activities is “conducted and is used by such a unit in keeping its books and records.” On column (m), the filer will need to enter the foreign taxes paid or accrued in U.S. dollars. However, if a unit of the CFC is a QBU that conducts its business in a foreign currency, the taxes paid or accrued should be determined in the functional currency of the CFC.

Lines 1. through 4.

For Lines 1 through 4, the filer states the names of the applicable entities that paid or accrued foreign tax credits.

Line 5.

For Line 5, the filer should combine amounts listed lines (l) on Line 5.

Line 6.

For Line 6, the filer should report the amounts listed in column (m).

Section 2 – Taxes Deemed Paid (Section 960(b)

The purpose of Section 2 is to track deemed-paid foreign income taxes with respect to current year PTEP distributions from lower-tier foreign corporations to the foreign corporation the Schedule E is being filed.

Column (a)

Column (a) asks the filer to list the name of the related foreign corporation or pass-through entity (partnership or disregarded entity) that the foreign tax was paid.

Column (b)

Column (b) asks the filer to enter the EIN or reference ID number of the related payor of the foreign tax. A reference ID number is required only in cases in which no EIN was entered for the foreign corporation.

Column (c)

Column (c) asks the filer to enter the two-letter codes of the foreign country the foreign taxes were paid. Country Codes are available at irs.gov/countrycodes.gov. If taxes were paid or accrued to more than one country with respect to the same income, the filer should include an attachment listing the applicable countries.

Column (d)

Column (d) asks the filer to disclose each applicable PTEP group for the associated foreign tax paid. Where the E&P of a CFC consists in whole or in part of PTEP, special rules under Section 959 will determine the ordering and taxation of each distribution of PTEP. Column (d) will require the filer to classify the income associated with each Section 960(b) foreign tax credit into a PTEP and disclose the PTEP in column (d). Below is the a list of the PTEP group:

Group Code Reclassified section 965(a) PTEP R965a

Reclassified section 965(b)

PTEP R965b General section 959(c) (1)

PTEP 959c1 Reclassified section 951A

PTEP R951A Reclassified section 245A(d)

PTEP R245Ad Section 965(a)

PTEP 965a Section 965(b)

PTEP 965b Section 951A

PTEP 951A Section 245A(d)

PTEP 245Ad Section 951(a)(1)(A)

PTEP 951a1A

Column (e)

Column (e) asks the filer to include income from the lower-tier corporation under Section 951(a) or 951A and the established the PTEP to which the distribution is attributed.

Column (f)

Column (f) asks the preparer to state (in functional currency) the PTEP distributed in functional currency from a lower-tier foreign corporation.

Column (g)

Column (g) asks the filer to the lower-tier foreign corporation’s PTEP in the PTEP group within the annual PTEP account identified in column (d) and column (e). The filer must enter the amount in the functional currency of the distributing lower-tier foreign corporation.

Column (h)

Column (h) asks the filer to enter the total amount of the lower-tier foreign corporation’s PTEP group taxes with respect to the PTEP group within the annual PTEP account identified in column (d) and column (e). The amounts should be entered in U.S. dollars.

Column (i)

For Column (i), the filer should enter in U.S. dollars the amount of the recipient foreign corporation’s income taxes deemed paid that are properly attributable to the PTEP distribution reported on Column (f) and not deemed to have been paid by the domestic corporation for any prior year.

Part II Election

Part II asks if Section 986(a)(1)(D) has been made to translate taxes using the exchange rate on the date of payment. The 2004 JOBS Act added a new election in Section 986(a)(1)(D) for a taxpayer that otherwise is required under Section 986(a)(1)(A) to translate foreign taxes into U.S. dollars using the average exchange rate for the tax year. This provision allows such a taxpayer to elect to use the exchange rate at the time the foreign taxes are paid instead of the average exchange rate for the tax year. Once elected, this provision applies to the tax year for which it was made and all later years unless revoked with the IRS’s consent. Note, however, that this election applies only to the translation of foreign taxes and foreign tax adjustments; it does not apply to the translation of a foreign corporation’s earnings and profits or to the translation of dividends through constructive inclusions. Part II asks the filer to state the date of the election if a Section 986(a)(1)(D) election has been made.

Part III. Taxes for Which a Foreign Tax Credit is Disallowed

Part III of Schedule E asks the filer to report foreign taxes of a CFC that were paid but for which no foreign tax credits were allowed. The purpose of disclosing foreign tax on Part III of Schedule E is to disclose foreign taxes of the CFC’s E&P. However, foreign taxes that cannot be claimed as a foreign tax credit due to the anti-splitter or foreign deficit rule should not be disclosed on Part III of Schedule E. These rules will be discussed in more detail below.

Columns (a) and (b)

Column (a) asks the filer to list the name or names of the foreign corporation or pass-through entity (partnership or disregarded entity) that paid the foreign tax and a foreign tax credit was disallowed.

Column (b) asks the filer to enter the EIN or reference number of the payor of the foreign tax.

Column (c)

Column (c) asks the filer to enter the foreign income taxes that are disallowed under Section 901(j), which generally applies to certain sanctioned countries. Sanctioned countries include North Korea, Iran, Syria, and Sudan.

Column (d)

Column (d) asks the filer to enter the foreign taxes that are disallowed under Internal Revenue Code Section 901(k). This generally applies to certain foreign taxes paid on dividends if the minimum holding period is not met with respect to the underlying stock, or if the CFC is obligated to make related payments with respect to positions in similar or related property. Section 901(k) cross-reference the rules of Section 246(c). This generally means a deduction for a dividend is not allowed if the dividend was paid in the next preceding taxable year of the corporation or the corporation is tax exempt under Section 501.

Column (e)

Column (e) asks the filer to list any foreign taxes on a covered asset acquisition and enter the disqualified portion of the tax under Section 901(m) of the Internal Revenue Code. A covered asset involves three types of transactions: 1) a qualified stock purchase with a Section 338 election (Section 338 provides that if a purchasing corporation (“P”) purchase 80 percent or more of the stock of a target corporation (“T”) within 12 months or loss, it may elect within a specified time period to treat the target as having sold all of its assets for their fair market value in a single transaction); 2) any acquisition treated as a purchase of assets for U.S. tax purposes, but an acquisition of stock is disregarded for foreign tax purposes; or 3) the purchase of a partnership interest with a Section 754 election to avoid taxing the buying partner on the appreciation of his proportionate share of partnership assets prior to the date of purchase, the partnership may make an election under Section 794 of the Internal Revenue Code.

Column (f)

Column (f) asks the filer to enter the amount of taxes paid or accrued by the foreign corporation to the United States. The filer should understand that there is no credit permitted for these taxes because only foreign income taxes paid or accrued to a foreign country or territory of the United States are allowed a credit.

Column (g)

Column (g) asks the filer to report foreign income taxes related to the current tax year that have been suspended due to the rules of Section 909 of the Internal Revenue Code. Section 909(a) of the Internal Revenue Code provides that if there is a foreign tax credit splitting event with respect to a foreign income tax paid or accrued by a taxpayer, such tax shall not be taken into account for federal tax purposes before the taxable year in which the related income is taken into account by the taxpayer. A foreign tax credit splitting event occurs when the income associated with the foreign taxes is (or will be) taken into account for U.S. tax purposes by a person for U.S. tax purposes. The related person is often called a “covered person” and is defined to include a person who directly or indirectly owns (or is owned by) the taxpayer to the extent of at least 10 percent of vote or value, or a person related to the taxpayer within the meaning of Sections 267(b) or 707(b). If a splitting event occurs in the case of a Section 902 or 960 credit, foreign taxes are not taken into account until the related income is taken into account for U.S. tax purposes by the relevant corporation or individual.

Column (h)

Column (h) asks the filer to enter taxes for which a foreign tax credit is disallowed other than those detailed in columns (c) through (g). Such taxes may include, but are not limited to, taxes attributable to Section 245A(d) income, certain taxes on the purchase of the sale of oil and gas (Section 901(f)), certain taxes used to provide subsidies (Section 901(i)), and taxes for which no credit is allowed because of the boycott provisions of Section 908.

Column (j)

For column (j), the filer enters the total amount for each payor in columns (c) through (h).

Lines 1. and 2.

For Lines 1 and 2, information is provided for taxes for which foreign tax credits were disallowed.

Line 3.

Line 3 asks the filer to total each amount in column (h) and enter the total in functional currency.

Line 4.

Line 4 asks the filer to translate the amount listed on Line 3 in U.S. dollars (translated at the average annual exchange rate).

Schedule E-1 Taxes Paid, Accrued, or Deemed Paid on Earnings and Profits of Foreign Corporation

The Importance of Categorizing Accumulated E&P of a CFC

Anyone who wishes to complete Schedule E-1 must understand the basketing and ordering rules of Internal Revenue Code Section 959. Virtually all CFCs annually generate subpart F income or, more likely, GILTI which becomes recharacterized as previously taxed earnings and profits (or PTEP). However, not all PTEP are treated equally. PTEP must be allocated into four separate categories or “baskets” set forth in Internal Revenue Code Section 904(d). This allocation is made based on how the PTEP was generated. PTEP are also subject to a set of ordering rules that clarifies how distributions of PTEP are treated to the recipient.

The basketing and ordering rules matter in calculating the foreign tax credits that would reduce, on a dollar-for-dollar basis, the amount of U.S. income tax owed. The amount of foreign tax credits that can be taken, however, is subject to the limitations imposed in Section 904(a) for each basket of income. Income categorized in one basket cannot offset an income deficiency in another basket. There are baskets for passive category income, GILTI, foreign branch income, and a catchall general category basket for active business income. For example, any foreign taxes paid or accrued on GILTI are allocated to the GILTI basket. If a U.S. shareholder has excess foreign tax credits in the GILTI basket, but not in the general category basket, any excess foreign taxes allocated to the GILTI basket generally cannot be reallocated to the general category basket, or vice versa.

Where the E&P of a CFC consists in whole or in part of PTEP, special rules under Section 959 apply in determining the ordering and taxation of distributions of such PTEP. Amounts included in the gross income of a U.S. shareholder, such as subpart F income or GILTI, are not included in gross income again when such amounts are distributed to the shareholder, either directly, indirectly, or through a chain of ownership. A PTEP distribution is generally allocated in the following order of priority:

1. PTEP attributable to investments in U.S. property under Section 959(c)(1);
2. PTEP attributable to subpart F income under Section 959(c)(2); and
3. general current and accumulated E&P under Section 959(c)(3).

For Section 959 purposes, a distribution is generally attributable to E&P according to the last in first out method (“LIFO”).

By way of background, the U.S. Treasury Department and the IRS proposed several iterations of the rules for determining foreign tax credits for U.S. shareholders. Initially, it was proposed in November 2018 that CFCs be required to establish annual PTEP accounts for each of the four Section 904(d) baskets. Within each account, PTEP must be assigned to one of 10 different PTEP groups based on the U.S. shareholder’s underlying income inclusion and Section 956 reclassifications. Under these rules, a CFC accounts for a Section 959(b) distribution by adding the amount distributed to the applicable annual PTEP account and PTEP group from which the CFC made the distribution. A CFC that makes a Section 959 distribution must similarly reduce the annual PTEP group from which the distribution is made by the distribution amount. A CFC must also reduce PTEP groups that relate to Section 959(c)(2) PTEP to account for reclassifications of amounts into those groups as Section 959(c)(1) PTEP (reclassified PTEP) and increase the PTEP group that corresponds to the reclassified amount.

In 2019, the U.S. Treasury Department and the IRS proposed to increase the number of PTEP groups from 10 to 16. See IRS Notice 2019-01. However, the final and proposed regulations issued later in December 2019 reduced the number of PTEP groups back to 10, consolidating the initially proposed groups with the ones contemplated by Notice 2019-01. These 10 PTEP groups are set forth in columns (e)(i) through (e)(x) of Part I of Schedule J, each of which will be discussed below under the heading “Column (e).”

Although Section 956 has virtually no significance following the availability of the 100 percent dividends received deduction of Section 245A, the final regulations state that the distribution-ordering rule of Section 959(c) requires U.S. shareholders to reclassify Section 959(c)(2) PTEP as Section 959(c)(1) PTEP whenever the CFC has a Section 956 investment in U.S. property that was included in the U.S. shareholder’s gross income under Section 951(a)(1)(A), or would have been included except for Section 959(a)(2). In that case, the Section 959(c)(2) PTEP group is reduced by the functional currency amount of the reclassified PTEP, which is added to the corresponding Section 959(c)(1) PTEP group for the applicable Section 904(d) income bucket and the same annual PTEP account as the reduced Section 959(c)(2) PTEP group. See Curtail U.S. PTEP Reporting Complexity: Know Your P’s and Q’s by Lewis J. Greenwald, Brainard L. Patton, and Brendan Sinnott, Tax Notes Federal, Aug. 2, 2021, p. 731.

Schedule E-1 increased the 959(c)(2) PTEP categories to be disclosed on the schedule from one to five. It also expanded 959(c)(1) PTEP categories from one to five. In addition, Schedule E-1 requires untaxed E&P to be allocated into E&P subject to the Section 909 anti-splitter rules, E&P carried over from certain nonrecognition transitions, and hovering deficits under Section 959(c)(3). In addition, Treasury Regulations Section 1.960-3 requires that CFC shareholders report PTEP attributable to Section 965 inclusions, 965(b) deficit offsets, Section 956 investments in U.S. property, GILTI inclusions, subpart F inclusions, Section 245A hybrid dividends, and Section 1248 amounts. Within these categories, CFC shareholders must state whether or not the PTEP should be allocated to a Section 959(c)(2) or Section 959(c)(1) PTEP. Furthermore, CFC shareholders must separately track each PTEP according to its foreign tax credit bucket, and must track movements of PTEPs between Sections 959(c)(2) and Section 959(c)(1) categories.

Part 1 Columns- Accumulated E&P of Controlled Foreign Corporation

Part 1 of Schedule E-1 contains a number of columns. The CFC shareholder must complete each relevant column in the CFC’s functional currency. Section 985(b)(1)(A) of the Internal Revenue Code states the general rule that the functional currency will be “the dollar.” However, the functional currency of a “qualified business unit” (“QBU”) which could be a CFC will be “the currency of the economic environment in which a significant part of such a unit’s activities” is “conducted and which is used by such a unit in keeping its books and records.” See IRC Section 985(b)(1)(B).

Columns (a), (b), and (c)

In columns (a), (b), (c), the filer should report only the foreign income taxes the foreign corporation pays or accrues attributable to the subpart F income group, the tested income group, and the residual group, respectively.

Column (d)

For column (d), the filer should report taxes suspended under Section 909. Under Section 909, where there is a “foreign tax credit splitting event” with respect to foreign income taxes paid or accrued, the foreign income tax is not taken into account for U.S. purposes in that year. The definition of “foreign tax credit splitting event” is broad and could reach a variety of situations such as disregarded payments, transfer pricing adjustments, contributions of property resulting in a shift of deductions and timing differences under U.S. and foreign law. Any Section 909 suspended taxes should be reported under this column.

Column (i)

A filer will use Column (i) to report previously taxed income reclassified as Section 965(a) PTEP under Section 959(c)(1)(A) as investments in U.S. property. The most frequent investment in U.S. property is a loan from the CFC to the U.S. shareholder or a person related to the U.S. shareholder. Section 965(a) requires U.S. shareholders to include in income an amount based on the accumulated post-1965 foreign earnings of specified foreign corporations or SFC as if those earnings had been repatriated to the U.S. Any foreign earnings that are taxed under Section 965(a) become Section 965(a) PTEP for purposes of Schedule E-1. For Column (e)(i), the filer must state previously taxed Section 965(a) E&P reclassified under Section 959(c)(1)(A).

Column (ii)

A filer will use Column (ii) to report previously taxed income reclassified as Section 965(b) PTEP under Section 959(c)(1)(A) (reclassified as investments in U.S. property). Section 965(b) permits U.S. shareholders to reduce Section 965(a) inclusions based on deficits in E&P accumulated by other SFCs. Under Section 965(b)(4)(A), the deferred foreign earnings that would have been included in the U.S. shareholder’s income under Section 965(a), but were not included because of the sharing of an E&P deficit pursuant to Section 965(b), increases PTEP for the SFC that had positive earnings. Section 965(b)(4)(B) increases the E&P of a deficit foreign corporation by the amount of the E&P deficit taken into account under Section 965(b).

Column (iii)

A filer will use Column (iii) to report general Section 959(c)(1) PTEP. Recall that Section 959(c)(1) PTEP are PTEP attributable to investments in US property or reclassified investments in U.S. property. Investments in US property include most tangible and intangible property owned by a CFC that has a US situs, such as stock of a domestic corporation, an obligation of a U.S. person, and a right to use a patent, copyright, or other forms of intellectual property in the United States if acquired or developed by the CFC for that use. A CFC is also treated as owning a proportionate interest in U.S. property owned by a partnership in which the CFC is a partner. Column (e)(iii) will also be used by the U.S. shareholder to report PTEP attributable to subpart F income inclusions reclassified as investments in U.S. property.

Column (iv)

A CFC shareholder will use Column (iv) to report PTEP originally attributable to inclusions under Section 951A GILTI, or GILTI reclassified as investments in U.S. property under Section 959(c)(1)(A).

Column (v)

A filer will use Column (v) to report PTEP attributable in three subgroups discussed below (which are aggregated into a single PTEP group) reclassified as Section 959(c)(1)(A) PTEP.

1. PTEP that is attributable to hybrid dividends under Section 245(e)(2) and reclassified as investments in U.S. property. Internal Revenue Code Section 245A(d) generally prohibits taxpayers from claiming credits or deductions for foreign income taxes paid or accrued (or treated as paid or accrued) on dividends for which a Section 245A deduction is allowed. Under Section 245A, an exception is allowed for certain foreign income of a domestic corporation that is a US shareholder by means of a 100 percent DRD for the foreign source portion of dividends received from “specified 10-percent owned foreign corporations” by certain domestic corporations that are US shareholders of those foreign corporations within the meaning of Section 951(b). Section 245A generally denies the DRD for hybrid dividends (i.e., amounts received from a CFC if the dividend gives rise to a local country deduction or other tax benefit).

2. PTEP that is attributable to Section 1248 amounts under Section 959(e). Under Section 1248(a), gain is recognized on a U.S. shareholder’s disposition of CFC stock in cases where there is a deferral of E&P. For purposes of Section 959(e), any amount included in the gross income of any person as a dividend by reason of subsection (a) or (f) of Section 1248 shall be treated as an amount included in the gross income of such person.

3. PTEP that is attributable to Section 1248 amounts from gain on the sale of a CFC by a CFC. With respect to individual U.S. shareholders who sell stock in a CFC recharacterized under Section 1248(a), the gains are realized at ordinary rates. Section 1248(b) provides for a ceiling on the tax liability that may be imposed on the shareholder receiving a Section 1248(a) dividend if the taxpayer is an individual and the stock disposed of has been held for more than one year. The Section 1248(b) ceiling consists of the sum of two amounts. The first amount is the U.S. income tax that the CFC would have paid if the CFC had been taxed as a domestic corporation, after permitting a credit for all foreign and U.S. tax actually paid by the CFC on the same income (the “hypothetical corporate tax”). The second amount is the addition to the taxpayer’s U.S. federal income tax for the year that results from including in gross income as long-term capital gain equal to the excess of the Section 1248(a) amount over the hypothetical corporate tax (the “hypothetical shareholder tax”).

Column (vI)

A filer will use Column (vi) to report PTEP attributable to Section 965(a) classified under Section 959(c)(2) (attributable to Section 951 or 951A). Under the Section 965 transition tax, U.S. shareholders of CFCs in existence at the end of 2017 were typically required to include in their income all of the CFC’s E&P. These earnings were generally taxed at a reduced rate through a sliding deduction allowable under Section 965(c).

Column (vii)

A filer will use Column (vii) to report PTEP attributable to Section 965(b)(4)(A) classified under Section 959(c)(2) (attributable to Section 951 or 951A). Column (e)(vii) will apply if the U.S. shareholder owned multiple CFCs prior to the 2018 tax year and some of the CFCs had positive E&P and others had negative E&P.

Column (viii)

A filer will use Column (viii) to report PTEP attributable to Section 951A classified under Section 959(c)(2). Column (viii) will represent PTEP related to GILTI inclusions.

Column (ix)

A filer will use Column (ix) to report PTEP attributable to Section 245A(d) classified under Section 959(c)(2). This type of PTEP is created when a CFC is owned by a domestic corporation and the CFC receives a hybrid dividend from another CFC. In general, a dividend received by a domestic corporation from a CFC is a hybrid dividend if the dividend received by the domestic corporation from the CFC (or a related person) is or was allowed a deduction (“hybrid deduction”) or other tax benefit under a relevant foreign law.

Column (x)

A filer will use Column (e) to report PTEP attributable to Section 951(a)(1)(A) or subpart F income. Column (x) will represent PTEP related to Subpart F inclusions.

These last three columns are the most frequently used PTEP columns on the Schedule E-1.

Specific Instructions Related to Lines 1 Through 14

Line 1a.

Line 1a asks the filer to enter the balances for each column at the beginning of the tax year. These balances should equal the amounts reported as the ending balances in the prior year Schedule E-1.

Line 1b.

Line 1b states that the filer should state if there is a difference between last year’s ending balance on Schedule E-1 and the amount which should be last year’s ending balance, including the difference for the difference. If there are multiple differences, include the explanation and amount of each such difference on the attachment.

Line 2.

The filer should use line 2 to reflect adjustments to a U.S. person’s foreign tax credit as a result of determining foreign income taxes. If a U.S. person has appropriately amended the immediately prior year return, including its Schedule E-1, to redetermine its U.S. tax liability, no adjustment should be included on this line. This line is only applicable if a U.S. person appropriately amended a prior year return and there were intervening years between the amended year return and the current year return for which an amended return was not filed. If so, an adjustment for the prior year amended return (and its impact on intervening years) should be reelected on line 2.

Line 3a.

The filer should include in column (a), (b), (c), or (e) foreign income taxes paid or accrued by the corporation during the prior years that were suspended due to the application of the rules of Section 909 and that are unsuspended in the current year because related income is taken into account by the foreign corporation, certain U.S. corporate U.S. corporate owner’s consolidated group. This amount is reported as a positive amount on line 3a.

Line 3b.

The filer should include as a positive amount in column (d) foreign income taxes related to the current tax year that have been suspended due to the rules of Section 909. By the way, a foreign tax credit is deductible only to the extent that the creditable tax is “paid or accrued.” Foreign taxes are generally treated as paid by the corporation on whom foreign law imposes legal liability. Under this “technical taxpayer” rule, the corporation or person who has legal liability for a foreign tax can be different from the person who realizes the underlying income under U.S. tax principles, resulting in a separation or “splitting” of foreign income to which the taxes relate. In some cases, the “splitting” can result in foreign tax credits following up to an individual without the associated income being subject to U.S. tax. Congress enacted Internal Revenue Code Section 909 for this situation. Under Section 909, where there is a “foreign tax credit splitting event” with respect to foreign income tax paid or accrued by a taxpayer, the foreign income tax is not taken into account for U.S. tax purposes before the tax year in which the related income is taken into account by the CFC.

Line 4.

The filer should include in Line 4 the total reported on Line 4 should be taken from Schedule E, Part 1, line 5, column (k).

Line 5.

The filer should report taxes carried over to a foreign surviving corporation after an acquisition by a foreign corporation of the assets of another foreign corporation in a transaction described in Internal Revenue Code Section 381.

Line 6.

The filer should report any taxes reported on Schedule E, Part 1, Section 2, Line 5, column (i).

Line 7.

The filer should attach a statement with a description and the amount of any adjustments required before taking into account taxes deemed paid by the foreign corporation. An example of an adjustment entered on line & is te foreign taxes imposed on receipt of a distribution of PTEP from a lower-tier foreign corporation.

Line 8.

The filer should report any paid or accrued on current income/E&P or accumulated E&P (combine lines 1c through 7).

Line 9.

The filer should report taxes deemed paid with respect to inclusions under Section 951(a).

Line 10.

The filer should report taxes deemed paid with respect to actual distributions taxed as E&P.

Line 11.

The filer should report foreign taxes reclassified from Section 959(c)(2) previously taxed E&P to Section 959(c)(1) previously taxed E&P. These amounts should be reported as negative numbers.

See below for an example regarding reclassifying Section 959(c)(1) E&P from Section 959(c)(2):

Example.

Domestic Corporation, a U.S. shareholder, wholly owns the only class of stock of CFC1, a foreign corporation. CFC1, in turn, wholly owns the only class of stock of CFC2, a foreign corporation. CFC2, in turn, wholly owns the only class of stock of CFC3, a foreign corporation. The functional currency of Domestic Corporation, CFC1, CFC2, and CFC3 is the U.S. dollar. During Year 1, Domestic Corporation reports an inclusion under Section 951(a)(1) of $100 as a result of subpart F income of CFC3. During Year 2, CFC3 distributes $40 to CFC2. CFC2 pays withholding tax of $4 on the distribution from CFC3. Such tax is a tax related to previously taxed subpart F income and is reported on line 4, column (e) of Schedule E-1 of CFC2’s Form 5471. In Year 2 CFC2 invests $40 in U.S. property. At the time of investment in such property, CFC2 continues to maintain a $36 balance in its Section 959(c)(2) previously taxed E&P account.

CFC2 reclassifies such amounts as Section 959(c)(2) previously taxed E&P accounts. CFC2 reclassifies such amounts as Section 959(c)(1) previously taxed E&P on Schedule J. Accordingly, $4 of foreign income taxes related to Section 959(c)(2) previously taxed E&P is reclassified to Section 959(c)(1).

Line 12.

For Line 12, the filer should attach a statement with a description and the amount of any adjustments required before taking into account taxes deemed paid by the foreign corporation.

Line 13.

For Line 13, the filer should enter the balance of taxes paid or accrued for lines 8 through 12.

Line 15.

For Line 15, the filer should enter the reduction to Column (b) tested income group for tested income not deemed paid.

Conclusion

The IRS Form 5471 is an incredibly complicated return. Each year an international tax attorney should review direct, indirect, and constructive ownership of the reporting CFC to determine the impact of any changes in percentages, filer categories, and CFC status. Workpapers should also be prepared and maintained for each U.S. GAAP adjustment and foreign exchange. In addition, an accounting should be made for adjustments to prior and current year previously taxed E&P that become PTEPs on Schedule J, E-1, and P.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to tax professionals.

Anthony has assisted large law firms and accounting firms, and high-net worth individuals with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or [email protected].

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.