Demystifying the 2023 Form 5471 Schedule E Used to Report and Track Foreign Tax Credits of Controlled Foreign Corporations

By Anthony Diosdi

Form 5471 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. The Form 5471 and schedules are used to satisfy the reporting requirements of Internal Revenue Code Section 6038 and 6046 along with the applicable regulations.

Substantively, it backstops various international sections of the Internal Revenue Code including Sections 901/904 (Code Section 901 and 904 provide rules governing foreign tax credits), Section 951(a) (Section 951a provide rules governing Subpart F income and Section 956. Section 956 is an anomaly and operates differently than the rest of subpart F. Generally, a U.S. shareholder of a foreign corporation must include in income his or her pro rata share of the foreign corporation’s increase in its earnings and profits in U.S. property), Section 951A (Section 951A provides rules governing the Global Intangible Low-Taxed Income or “GILTI”), Section 965 (Section 965 imposes a one-time transition tax on a U.S. shareholder’s share of deferred foreign income of certain foreign corporations), and Section 482 (Section 482 governs transfer pricing. A “transfer price” must be computed for controlled transactions in order to satisfy various financial reporting, tax, and other regulatory requirements). Associated forms with a Form 5471 include Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation), Form 5713 (International Boycott Report), Form 8621 (PFIC), and Forms 1116/1118 (Foreign Tax Credit).

Within the Form 5471, there are 12 schedules. This article discusses Schedule E and E-1 of the Form 5471. These schedules are used to track a foreign corporation’s foreign tax credits. This article will attempt to provide guidance as to how to prepare these incredibly complicated schedules.

Who Must Complete the Form 5471 Schedule E?

There are five filing categories (or should I say 12 filing categories) for the Form 5471. The category of filer determines the schedule of the Form 5471 that must be filed. There are a number of key terms that must be defined before determining which category filer a taxpayer is for purposes of the Form 5471. Below are the key terms that should be understood before preparing the Form 5471:

U.S. Person

Only U.S. persons 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 as defined by Section 7701(a)(30)(A) – (E). A tax-exempt U.S. entity may have a Form 5471 filing obligation. In addition, an individual who relies upon the residency provision of an income tax treaty to shed himself of U.S. income tax and files Form 8833 remains a U.S. person for purposes of the 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 categories of filers apply to U.S. persons for purposes of Form 5471 classification. 

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, owning directly, indirectly or constructively under the ownership rules of Section 958, ten percent or more of the total combined voting power of all classes of stock of a foreign corporation or the value of all the outstanding shares of a foreign corporation. Categories 1a, 1c, 5a, and 5c apply to U.S. shareholders for purposes of Form 5471 classification.

Controlled Foreign Corporation (“CFC”)

A foreign corporation is a CFC if, on any day during the foreign corporation’s taxable year, U.S. shareholders own more than 50 percent of the combined voting power of all classes of stock, or more than 50 percent of the total value, of the foreign corporation. Only U.S. shareholders are considered in applying for the 50 percent test. All forms of ownership, including direct, indirect (ownership through intervening entities), and constructive (attribution of ownership from one related party to another), are considered in applying the 50 percent test. The term “foreign” means a corporation that is not domestic. In other words, the corporation was not incorporated in a U.S. state or District of Columbia. See IRC Section 7701(a)(5).

An individual preparing a Form 5471 should not interpret terms in an entity name such as “ltd,” or “S.A.” to classify a foreign entity as a corporation for U.S. tax purposes. Instead, Treasury Regulation should be consulted to determine if a foreign entity is a corporation for U.S. tax purposes. Treasury Regulation 301.7701-2(b)(8) provides a list of foreign entities that will be treated as corporations for U.S. tax purposes. If a foreign entity is not in that list. Treasury Regulation Section 301.7701-3(b)(2) should be consulted. This regulation provides a relatively comprehensive list of foreign entities that will be treated as per se corporations, and, unless an election to the contrary is timely filed, the foreign organization may be treated as a partnership or a disregarded entity that is separate from its owner. Categories 1a, 1c, 5a, and 5c to CFCs for purposes of Form 5471 classification. .

Section 965 Specified Foreign Corporation (“SFC”)

An SFC is a foreign corporation that is either a CFC or has at least one U.S. shareholder that is a corporation. The term SFC includes not only CFCs, but also entities commonly referred to as 10/50 companies. These foreign companies have at least one U.S. shareholder, but are not CFCs because U.S. shareholders do not own more than 50 percent of the entity by vote or value. Categories 1a through 1c apply to SFCs.

Category of Filers

The Form 5471 and appropriate accompanying schedules must be completed (to the extent required on the form) and filed by the following categories of persons:

Category 1 Filer

A Category 1 filer is a U.S. shareholder of a SFC at any time during any taxable year of the SFC who owned that stock on the last day in that year on which it was an SFC. A SFC is a CFC, or any foreign corporation with one or more 10 percent domestic corporation shareholders.

Category 1a, 1b, and 1c Filers

Recently, the IRS expanded Category 1 filers to (1a, 1b, and 1c). Category 1a is a so-called catch all category and includes a U.S. shareholder of a Section 965 “specified foreign corporation” at any time during the tax year of the foreign corporation, and who owned that stock on the last day in that year. A Category 1a filer also does not fit into the definition of Categories 1b and 1c. Category 1b and 1c have been added as the result of Rev. Proc. 2019-40 and the repeal of the downward attribution rules.

A Category 1b filer is a U.S. shareholder that owns stock in a foreign corporation directly or indirectly, but the shareholder is unrelated to the foreign corporation within the meaning of Section 954(d)(3). Section 954(d)(3) defines control in a related party context. A Category 1b filer is typically a shareholder that owns a foreign corporation directly or through another entity. For purposes of Section 954(d)(3), control means,
With respect to a corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of stock entitled to vote or of the total value of the stock of such corporation.

A Category 1c filer is a U.S. shareholder of a foreign corporation only because of constructive stock ownership from a foreign corporation as per Internal Revenue Code Section 318(a)(3) and the shareholder is related to the foreign corporation under the definition of Section 954(d)(3).

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 change in substantial U.S. ownership – even if the change relates to stock owned by a U.S. person who is not an officer or director. For Category 2 purposes, a U.S. person is defined as a U.S. citizen, resident alien, domestic partnership, domestic corporation, domestic estate, and domestic trust. See Treas. Reg. Section 1.6045-1(f)(3)(i). Category 2 modifies the definition of a U.S. person. Under Treasury Regulations 1.6046-1(f)(3)(ii)(A), 1.6046-1(f)(3)(ii)(B), and 1.6046-1(f)(3)(iii) for Category 2 purposes, a U.S. person is a Puerto Rico resident, possessions resident , and Section 6013(g), (h) election (situations where a non-resident alien spouse makes an election to be taxed as a U.S. person). In regards to the definition of an officer or director, there is no clear answer as to what defines an officer or director for purposes of a Category 2 filer. However, Treasury Regulation Section 1.6046-1(d) defines a director or officer as “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.”

The Category 2 filing requirements do apply to just foreign corporations that are CFCs. Category 2 filing requirements apply to all foreign corporations.

For purposes of Category 2, a substantial change in U.S. ownership is when any U.S. person (not necessarily the U.S. citizen or resident who is the officer or director) acquires stock that causes him or her to own a 10 percent block, or acquires an additional 10 percent block, of stock in that corporation by vote or value. More precisely, if any U.S. person acquires stock, which, when added to any stock previously owned, causes him or her 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 does not create filing obligations under Category 2 for U.S. officers and directors. Stock ownership is a vote or value test.

Stock ownership for purposes of Category 2 is direct or indirect. For indirect ownership, stock owned by members of a shareholders family shall be taken into account for purposes of substantial change in ownership rules. Under Section 6046(c), the family of an individual shall be considered as including his or her brothers and sisters (whether by whole or half blood), his or her spouse, ancestors, and lineal descendants. Attribution from nonresidents is allowed.

Indirect ownership- for purposes of Category 2 filing obligations, a shareholder can have an ownership interest in an entity, and the entity is a direct owner of stock of a foreign corporation. For Category 2 filer purposes, the attribution rules apply only to foreign corporations and partnerships. A filer owns their proportional share of a foreign corporate stock owned by a foreign corporation. A Category 2 filer owns its proportional share of foreign corporate stock owned by a foreign partnership. See Treas. Reg. Section 1.6046-1(i)(1).

The regulations provide no inference of attribution of ownership through a foreign nongrantor trust, U.S. corporation, U.S. partnership, or disregarded entities. See Treas. Reg. Section 1.6046-1(i)(1).

Category 3 Filer

A U.S. person is a Category 3 filer with respect to a foreign corporation for a year if the U.S. person does any of the following during the tax year:

1. Acquires stock in the corporation, which, when added to any stock owned on the acquisition date, meets the Category 2 filer 10 percent stock ownership requirement.
2. Acquires additional stock that meets the 10 percent stock ownership requirement.
3. Becomes a U.S. person while meeting the 10 percent stock ownership requirement.
4. Disposes of sufficient stock in the corporation to reduce his or her interest to less than 10 percent stock ownership requirement.
5. Meets the 10 percent stock ownership requirement with respect to the corporation at a time when the corporation is reorganized.

For Category 3 purposes, a U.S. person is defined as a U.S. citizen, resident alien, domestic partnership, domestic corporation, domestic estate, and domestic trust. See Treas. Reg. Section 1.6045-1(f)(3)(i). Category 3 modifies the definition of a U.S. person. Under Treasury Regulations 1.6046-1(f)(3)(ii)(A), 1.6046-1(f)(3)(ii)(B), and 1.6046-1(f)(3)(iii) for Category 3 purposes, a U.S. person is a Puerto Rico resident, possessions resident, and Section 6013(g), (h) election (situations where a non-resident alien spouse makes an election to be taxed as a U.S. person).

Stock ownership for purposes of Category 3 is a vote or value test. Section 958 applies direct, indirect, and constructive ownership rules to determine stock ownership in the foreign corporation. The direct, indirect, and constructive ownership rules for purposes of a Category 3 filer can be defined as follows:

Direct ownership- an example of direct ownership is when a corporate shareholder’s name is on the stock certificate.

Indirect ownership- for purposes of Category 3 filing obligations, a shareholder can have an ownership interest in an entity, and the entity is a direct owner of stock of a foreign corporation. For Category 3 filer purposes, the attribution rules apply only to foreign corporations and partnerships. A filer owns their proportional share of a foreign corporate stock owned by a foreign corporation. A Category 3 filer owns its proportional share of foreign corporate stock owned by a foreign partnership. See Treas. Reg. Section 1.6046-1(i)(1).

The regulations provide no inference of attribution of ownership through a foreign nongrantor trust, U.S. corporation, U.S. partnership, or disregarded entities. See Treas. Reg. Section 1.6046-1(i)(1).

Constructive ownership- An individual is considered as owning stock owned by his spouse, children, grandchild, and parents. An individual shall be considered as owning the stock owned directly or indirectly by or for his brothers and sisters (whether by the whole or half blood), his spouse, his ancestors, and his lineal descendants. Treas. Reg. Section 1.6046-1(i)(2). Attribution from nonresidents is permitted for both Category 2 and 3 filers. This can result in unexpected Form 5471 filing obligations for U.S. persons. For example, let’s assume a nonresident alien who is married to a U.S. person establishes a foreign corporation. Let’s also assume that the U.S. person does not own any shares of the newly established foreign corporation and the U.S. person is not a director or officer of the foreign corporation. Even though the U.S. person does not own any shares of the U.S. corporation or can be classified as an officer or director of the foreign corporation, under the Category 3 attribution rules, the U.S. person has a Category 3 filing obligation. See IRC Section 6046(c); Treas. Reg. Section 1.6046-1(i)(2). In other words, if a nonresident alien spouse acquires 100 percent shares of a newly formed foreign corporation, for purposes filing a Form 5471, the U.S. resident spouse has constructively acquired 100 percent of the shares in the foreign corporation.

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, domestic partnership, domestic corporation, domestic estate, and domestic trust. See Treas. Reg. Section 1.6045-1(f)(3)(i). Category 4 modifies the definition of a U.S. person. Under Treasury Regulations 1.6046-1(f)(3)(ii)(A), 1.6046-1(f)(3)(ii)(B), and 1.6046-1(f)(3)(iii) for Category 4 purposes, a U.S. person is a Puerto Rico resident, possessions resident, and Section 6013(g), (h) election (situations where a non-resident alien spouse makes an election to be taxed as a U.S. person).

A U.S. person is considered to control a foreign corporation if at any time during the person’s taxable year, such person owns: 1) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote; or 2) more than 50 percent of the total value of shares of all stock of the foreign corporation. See Treas. Reg. Section 1.6038-2(b). For purposes of Category 4, a U.S. person need only have control over the foreign corporation at any time in the tax year of the corporation.
See IRC Section 6038(a). The definition of “control” for Category 4 purposes is different from Section 957(a) which defines a “controlled foreign corporation.”  Section 957(a) defines a “controlled foreign corporation” as a foreign corporation of which more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned, directly, indirectly or constructively under the Section 958 ownership rules by “U.S. shareholders” on any day during the foreign corporation’s tax year or more than 50 percent of the total value of the shares of the corporation. Under this definition. a controlled foreign corporation may potentially have multiple U.S. shareholders who collectively own more than 50 percent of a foreign corporation.

On the other hand, for purposes of Category 4 filers, the Internal Revenue Code examines whether a U.S. person owns more than 50 percent of a foreign corporation. Under Internal Revenue Code Sections 6038(a)(1), (e)(2), a U.S. person shall be deemed to be in control of a foreign corporation if at any time during that person’s taxable year it owns more than 50 percent of the total combined voting power of the total combined voting power of all classes of stock entitled to, or more than 50 percent of the total value of shares of all classes of stock of the foreign corporation. Section 6038(e)(2) refers U.S. persons to Section 318(a) to determine if the U.S. person directly, indirectly, or constructively owns enough shares to have “control” of a foreign corporation. 

The attribution rules for Category 4 filers are different compared to Category 2 and 3 filers. This is because Section 6038(e)(2)(A) modifies Section 318(a)(3)(A), (B), (c) so that downward attribution from foreign persons to United States persons is prohibited. However, Section 6038(e)(2)(B) modifies Section 318(a)(2)(C) for upward attribution from a corporation, changing the default 50 percent ownership threshold to 10 percent.

For Category 4 purposes of the constructive ownership rules, no attribution from grandparent, there is no sibling attribution. There however is parent and child attribution under Section 318(a)(1)(A)(ii) and spousal attribution under Section 318(a)(1)(A)(ii).

For Category 4 purposes, there is upward attribution from entities other than corporations. For example, partners own a proportional share of partnership-owned stock, beneficiaries own a proportional share of estate-owned stock, beneficiaries own their actuarially computed share of non grantor trust owned stock. See IRC Sections 318(a)(2)(A), IRC Section 318(a)(2)(A), IRC Section 318(a)(2)(B)(i). There is also upward attribution from corporate structure for purposes of Category 4 filers. However there are limits. There is no attribution of stock of a subsidiary to a shareholder if the shareholder owns less than 10 percent of the outstanding shares of the entity. See IRC Section 318(a)(2)(C); IRC Section 6038(e)(2)(C). If the shareholder owns more than 10 percent of the stock in a subsidiary corporation, the shareholder will own a proportional share of the stock for purposes of determining control. See IRC Section 318(a)(2)(C), IRC Section 6038(e)(2)(C). If the shareholder owns subsidiary stock and owns more than 50 percent of the outstanding stock in the entity, there is automatic control for purposes of Category 4 filing. See IRC Section 318(a)(2)(C), IRC Section 6038(e)(2)(C).

Unlike other categories of filers, under Section 6038(e)(2)(A), there is no downward attribution from a foreign person to a Category 4 filer. Section 318(a)(3) shall not be applied so as to consider a U.S. person as owning stock which is owned by a person who is not a U.S. person.

Category 5 Filer

A person is a Category 5 filer if the person: 1) is a U.S. shareholder of a CFC at any time during the CFC’s taxable year; and 2) owns stock of the foreign corporation on the last day in the year in which that corporation is a CFC. Category 5 uses the standard definition of a U.S. person under Section 7701(a)(30).

For category 5 purposes, partners own a proportional share of partnership-owned stock, beneficiaries own a proportional share of estate-owned stock, beneficiaries own their actuarially computed share of non grantor trust owned stock. See IRC Sections 318(a)(2)(A), IRC Section 318(a)(2)(A), IRC Section 318(a)(2)(B)(i). There is also upward attribution from corporate structure for purposes of Category 5 filers. However there are limits. There is no attribution of stock of a subsidiary to a shareholder if the shareholder owns less than 10 percent of the outstanding shares of the entity. See IRC Section 318(a)(2)(C); IRC Section 6038(e)(2)(C). If the shareholder owns more than 10 percent of the stock in a subsidiary corporation, the shareholder will own a proportional share of the stock for purposes of determining control. See IRC Section 318(a)(2)(C), IRC Section 6038(e)(2)(C). If the shareholder owns subsidiary stock and owns more than 50 percent of the outstanding stock in the entity, there is automatic control for purposes of Category 5 filing. See IRC Section 318(a)(2)(C), IRC Section 6038(e)(2)(C). For purposes of Category 5 filers, consider the ownership value of the shares of the CFC in determining the value of the corporate subsidiary stock.

Category 5a, 5b, and 5c Filers

Recently, the IRS expanded Category 5 filers to (5a, 5b, and 5c). Category 5a is a so-called catch all category and includes a U.S. person who is a ten percent or greater shareholder in a corporation that was a controlled foreign corporation for an uninterrupted period of thirty days during its annual accounting period and who owned stock in the controlled foreign corporation on its last day of its accounting period.

A Category 5b filer is an unrelated Section 958(a) U.S. shareholder who would not control (more than 50 percent vote or value) the CFC or be controlled by the same person which controls the CFC.

Category 5c filer is a related constructive U.S. shareholder. A Category 5c filer is typically an entity controlled by (more than 50% vote or value) the same person which controls the CFC and files only due to this downward attribution.

Why Category of Filers Matter

The category of filer will determine the Form 5471 schedule that is required to be attached to the Form 5471. Category 1a, 1b, 1c, 4, 5a, 5b, 5c filers are required to file Schedule E. Category 1a, 1b, 4, 5a, and 5b are required to file Schedule E-1.

Lines a and b

Schedule E begins by asking the filer to complete lines a and b. Line a specifically asks the filer to determine the category of income and enter the applicable corresponding code. In order to answer the question on Line a, the filer must reference the instructions to IRS Form 1118. IRS Form 1118 states that there are six categories of foreign source income to be reported on Schedule E and assigns codes to each category of income. The filer may select from the applicable categories of income and codes listed below:

Code Category of Income

FB Foreign Branch Category Income

PAS Passive Category Income

901j Section 901(j) Income

RBT Income Re-Sourced by Treaty

GEN General Category Income

Below is a definition of each category of foreign source income:

Foreign Branch Category Income

Foreign branch income is defined under Internal Revenue Code 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”).

Passive Category Income

Passive income is generally the following:

1. Any income received or accrued that would be foreign personal holding company income if the corporation were a CFC. This 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”).
   
   

Section 901(j) Income

Section 901(j) income is income earned from a sanctioned country.

Income Re-Sourced by Treaty

If a sourcing rule in an applicable income tax treaty treats any U.S. source income as foreign source, and the corporation elects to apply the treaty, the income will be treated as foreign source.

General Category Income

This category includes all income not described above.

Line b

Line b states that if Code 901j is entered on Line a, the country code for the sanctioned country using the two-letter codes (from the list at IRS.gov/countrycodes) must be entered.

Line c

If one of the RBT codes is entered on line a, the filer should enter the country code on Line c.


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 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 (d)

Column (d) 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 (e)

Column (e) asks the filer to disclose the U.S. tax year of the foreign corporation to which the tax relates.

Column (f)

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

Column (g)

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

Column (h)

Column (h) asks the filer to enter the code of the country in which local tax is paid.

Column (i)

Column (i) asks the filer to enter the tax paid or accrued in the local currency in which the tax is payable and not the functional currency of the CFC. Internal Revenue Code Section 985(b)(1)(A) states the general rule that the functional currency will be “the dollar.”

Columns (j) and (k)

Columns (j) and (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 (l)

Column (l) 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 (l), 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.

Line 5.

For Line 5, the filer should combine Lines 1 through 4 of Column K.

Line 6.

For Line 6, the filer should combine Lines 1 through 4 of Column l.

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). It is likely that the IRS will assign codes to each PTEP in the future and the filer will disclose the PTEP as a code on column (d) of Part 2. 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 from established PTEP accounts.

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 (in functional currency) the total amount of PTEP in the PTEP account which a distribution was made.

Column (h)

Column (h) asks the filer to state the total amount of the PTEP group taxes with respect to PTEP groups in U.S. dollars.

Column (h)

For Column (h), the filer should enter the 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 (e). This amount should be entered in U.S. dollars.

Column (i)

For Column (i), the preparer 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 preparer 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.

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. 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 foreign taxes paid or accrued by the CFC in functional currency.

Column (g)

Column (g) asks the filer to enter the amount of foreign taxes for which a foreign tax credit is disallowed other than those in columns (c) through (f) in functional currency.

Column (h)

Column (h) asks the filer to enter the total amount for each payor in columns (c) through (g) in functional currency.

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 959 categorization and ordering rules. This section of this article discusses the basketing and ordering rules that are necessary to complete the Schedule J. Virtually all CFCs annually generate Subpart F income or, more likely, GILTI which becomes recharacterized previously taxed earnings and profits or (“PTEP”). However, not all PTEP is treated equally. PTEPs must be allocated into four separate Section 904(b) categories, known as baskets, depending on how the PTEP was generated. PTEPs are also subject to a certain set of ordering rules that clarifies how distributions of such PTEP are treated to the recipient.

This matters in large part for the purpose of the calculation of available foreign tax credits that would reduce a dollar-for-dollar basis the amount of U.S. income tax owed, and the credibility of foreign taxes allocable to each Section 904(d) basket is subject to the Section 904(a) limitation with respect to the specific basket. Income categorized in one basket cannot offset income in another basket. There are baskets for passive income, GILTI, foreign branch income, and a catchall basket for active business income. For example, any foreign taxes paid or accrued on GILTI income are allocated to the GILTI basket. If a U.S. shareholder is in an excess credit position with respect to its GILTI basket and excess limitation position with respect to its general basket, any excess foreign taxes that have been allocated to the GILTI basket generally cannot be reallocated to the general basket.

Where the E&P of a CFC consists in whole or in part of previously tax earning and profits, 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 as GILTI or subpart F income are not included in gross income again when such amounts are distributed to the shareholder, directly, indirectly, or through a chain or ownership. A PTEP distribution is generally allocated in the following order: 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”).

On November 28, 2018, the Department of Treasury and the IRS released proposed regulations related to the determination of the foreign tax credit (the Proposed Regulations). Under the Proposed Regulations, CFCs are required to establish an annual account for PTEP for each of the Section 904 baskets. Within each account, a CFC is required to assign a PTEP to one of ten different PTEP groups in each of the relevant Section 904 basket based on the U.S. shareholder’s underlying income inclusion, while also taking into account PTEP reclassifications as a result of a Section 956 inclusion.

A CFC accounts for a Section 959(b) distribution that it receives by adding the distribution amount to an annual PTEP account and PTEP group from which the distributing 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.

Notice 2019-1

Immediately after issuing the proposed regulations, the Treasury and the IRS released Notice 2019-1, 2019-3 IRM 275, announcing their intention to issue regulations on foreign corporations with PTEP. Notice 2019-1 affirmed the requirement to maintain annual PTEP accounts but expanded the number of PTEP groups from 10 to 16 and provided that the rules would be coordinated with Prop Reg Section 1.960-1 and 3.

The Final Section 960(b) Regulations

On December 17, 2019, the Treasury and the IRS issued final regulations under Internal Revenue Code Section 960(b) which finalized the proposed regulations. The final Section 960(b) regulations modified the proposed regulations. The PTEP groups have consolidated the 959(c)(2) PTEP groups into five. The five PTEP groups arise under Internal Revenue Code Sections 965(a),(Section 965(a) requires U.S. shareholders to include in income an amount based on the accumulated post- 1986 deferred foreign earnings of SFCs) 965(b)(4)(A), (Under Section 965(b)(4)(A), the deferred foreign earnings that would have been included in a U.S. shareholder’s income under Section 965(a), but were not so 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), in turn, increases the E&P of a E&P deficit foreign corporation by the amount of the E&P deficit taken into account under Section 965(b), 951A(f)(2), (Allocation of GILTI to a CFC), 245A(d), (Section 245A(d) prohibits taxpayers from claiming credits or deductions for foreign income taxes paid or accrued on dividends for which a Section 245A deduction is allowed), and 951(a)(1)(A) (Subpart F income). Although Section 956 has virtually no significance following the availability of the 100 percent dividends received deduction of Section 245A, the final regulations state the 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 described in the Section 904 category and 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.

The 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 J 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, the Treasury Regulations under Section 1.960-3 requires that CFC shareholders report PTEP attributions 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. CFC shareholders must separately track each PTEP according to its foreign tax credit category. In addition, CFC shareholders must track movements of PTEPs between Setions 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) PTEPs 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) 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 CFC shareholder will use Column (iii) to report general Section 959(c)(1) PTEPs. Recall that Section 959(c)(1) are PTEPs 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 US 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 US property owned by a partnership in which the CFC is a partner.

Column (iv)

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

Column (v)

A CFC shareholder will use Column (v) to report PTEPs 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 an Internal Revenue Code 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 PTEPs attributable to Section 965(a) classified under Section 959(c)(2) (attributable to Sections 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 scale deduction allowable under Section 965(c).

Column (vii)

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

Column (ix)

A filer will use Column (ix) to report PTEPs 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 a 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 (x) to report PTEPs attributable to Section 951(a)(1)(A) or subpart F income. Column (e)(x) will represent PTEPs 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 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, include the difference for the difference. If there are multiple differences, include the explanation and amount of each such difference on the attachment.

Line 2.

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.

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.

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 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.



Report the balance of taxes paid or accrued by combining lines 8 through 14 in column a.

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 Ching & 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 other tax professionals.

He 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 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.