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. 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). The calculation of taxable income from a foreign corporation to its shareholders is reported on various schedules of the Form 5471. 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).
There are five filing categories (or should I say 9 filing categories) for the Form 5471. The category of filer determines the schedule of the Form 5471 that must be filed. This article will discuss each category of filer for purposes of the Form 5471.
Defining Key Terms For Filing the Form 5471
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.
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(b0(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.
Special consideration must be given to entities known as a limitada or (“S.R.L.” or “S. de R.L.”). For the check-the-box election purposes, these entities are generally treated as either a single-member disregarded entity, a corporation, or a partnership. Because laws vary from country-to-country in connection with whether a limitada member may be liable for one or more obligations of the entity, the default U.S. tax classification of a limitada may not be universally certain. See Putting Square Pegs Into Round Holes- U.S. Tax and Estate Planning Considerations for Foreign Structures Without Domestic Equivalents (2024), Leslie A. Share & Alfredo R. Tamayo.
Section 965 Specified Foreign Corporation (“SFC”)- A SFC is a CFC or any foreign corporation in which a domestic corporation is a United States shareholder. See IRC Section 965(e)(1)(B).
Category of Filers
One of the very first issues that must be considered when preparing a Form 5471 is to determine the proper category filer. There are five filing categories. Below, please find a detailed discussion for each category filer.
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 Internal Revenue Service or (“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 created by the repeal of Section 958(b)(4). The repeal of Section 958(b)(4) created situations where U.S. persons could be considered a U.S. shareholder of foreign corporations through constructive ownership 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. For purposes of defining the term “related,” a Category 1b filer is typically a shareholder that owns a foreign corporation but does not control the foreign corporation. 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 the constructive stock ownership rules 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). Section 958(b) applies (with several modifications) the constructive ownership rules of Section 318(a). These constructive ownership rules of Section 318(a) require attribution of stock between certain family members and between corporations, partnerships, trusts and estates, on the one hand, and their shareholders, partners or beneficiaries, on the other. See IRC Section 318(a)(1)-(3). For purposes of Category 1c, the filer is a U.S. shareholder of a foreign corporation only because of constructive stock ownership from a foreign person and is related to the foreign corporation as per Section 954(d)(3). The term “related” for purposes of Category 1c means the U.S. shareholder has “control” or more than 50 percent ownership of the foreign corporation as a result of the constructive ownership rules.
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.
In addition to 5 examples discussed above, a Category 3 filing requirement may be triggered when a U.S. person marries a nonresident alien who owns a foreign corporation. A corporate reorganization may also trigger a Category 3 filing requirement.
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. Note, for Category 4 filer purposes, the term “U.S. shareholder” is not used. Instead the term “U.S. person” is used. 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 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. For purposes of defining the term “related,” a Category 5b filer is typically a shareholder that owns a foreign corporation but does not control the foreign corporation. 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 5c filer is a U.S. shareholder of a foreign corporation only because of the constructive stock ownership rules 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). Section 958(b) applies (with several modifications) the constructive ownership rules of Section 318(a). These constructive ownership rules of Section 318(a) require attribution of stock between certain family members and between corporations, partnerships, trusts and estates, on the one hand, and their shareholders, partners or beneficiaries, on the other. See IRC Section 318(a)(1)-(3). For purposes of Category 5c, the filer is a U.S. shareholder of a foreign corporation only because of constructive stock ownership from a foreign person and is related to the foreign corporation as per Section 954(d)(3). The term “related” for purposes of Category 5c means the U.S. shareholder has “control” or more than 50 percent ownership of the foreign corporation as a result of the constructive ownership rules.
Why Category of Filers Matter
The category of filer will determine the Form 5471 schedule that is required to be filed. Below is a sample of schedules that are required to be filed by Form 5471 filers.
Schedule A (Stock of a Foreign Corporation)
Category 3 and 4 filers are required to file Schedule A. This schedule is used to report amounts of total shares issued and outstanding shares of the foreign corporation at the beginning and end of the annual accounting period the CFC.
Schedule B Part 1 (U.S. Shareholders of a Foreign Corporation)
Category 3 and 4 filers are required to file Schedule B, Part 1. This schedule is used to list all U.S. persons owning at any time during the annual accounting period at least 10 percent of the vote or value of the foreign corporation directly or indirectly through foreign entities. The shares should be reported at the beginning and end of the foreign corporation’s annual accounting period.
Schedule B Part II (Direct Shareholders of a Foreign Corporation)
Category 1a, 1c, 3, 4, 5a, and 5c filers are required to file Schedule B, Part II. This schedule reports the direct shareholders of a foreign corporation. If a foreign corporation is owned by a foreign disregarded entity, information regarding the owner of the disregarded foreign entity must be disclosed.
Schedule C (Income Statement) and F (Balance Sheet)
Category 3 and 4 filers are required to file Schedule C and Schedule F. Schedule C is the income statement for the foreign corporation in functional currency and U.S. dollars. Schedule F requires the shareholder of foreign corporation to prepare a balance sheet for the entity. The financial statements of the foreign corporation should be prepared and translated in accordance with U.S. GAAP.
Schedule E (Income, Ear Profits, and Excess Profits, and Excess Profits Taxes Paid or Accrued)
Category 1a, 1b, 1c, 4, 5a, 5b, and 5c filers are required to file Schedule E. This schedule is used to report taxes paid or accrued by a foreign corporation for which a foreign tax credit is permitted. A separate Schedule E is required to be filed for foreign baskets of income. For the purpose of Schedule E, the baskets for foreign income include Section 951A Category Income; Passive Category of Income, Section 901(j) income, Income Re-sourced by Treaty, and General Category of Income.
Schedule E-1 (Taxes Paid, Accrued, or Deemed Paid on PTEPs of E&P of CFCs)
Category 1a, 1b, 5a, and 5b filers are required to file Schedule E-1. Schedule E-1 is utilized to disclose the cumulative balance of foreign income taxes paid or accrued by a CFC by each category of income. The balances are reduced for taxes associated with dividends and inclusions.
Schedule G (Other Information)
Category 1c, 3, 4, 5a, and 5c filers are required to file Schedule G. Schedule G asks questions regarding the types of entities the foreign corporation owns, whether the foreign corporation was or became a participant in a cost sharing arrangement, whether the foreign corporation participated in any reportable transactions as defined in Treasury Reg. Section 1.6011-4 (Under Section 1.6011-4(b), one category of reportable transaction is a transaction with contractual protection. Generally, a transaction with contractual protection is a transaction involving a fee that is refundable if all or part of the intended tax consequences from the transaction are not sustained or a transaction involving a fee that is contingent on the taxpayer’s realization of tax benefits), and whether the foreign corporation was involved in a covered asset acquisition (a covered asset acquisition is a transaction that is treated as a stock acquisition for U.S. federal income tax purposes but is either treated as a stock acquisition or is disregarded for foreign income tax purposes) under Section 901(m), or a foreign tax credit splitter transaction under Section 909 (Under Section 909, where there is a “foreign tax credit splitting event” with respect to foreign income tax paid or accrued by a filer, the foreign income tax is not taken into account by the filer).
Schedule H (Current Earnings and Profits)
Category 4 and 5a filers are required to file Schedule H. This schedule is utilized to report the CFC’s current earnings and profits for U.S. tax purposes. Schedule H reports net income or (loss) per foreign books of account. The amounts are reported in functional currency. A separate Schedule H must be completed for each category of income which includes a general category of income, passive category of income, or section 901(j) category of income.
Schedule I (Summary of Shareholder’s Income from Foreign Corporation)
Category 4, 5a, and 5b filers are required to file Schedule I. Schedule I is used to determine what portion of subpart F income is being allocated to the shareholder filing the Form 5471. A separate Schedule I needs to be filed for each filer.
Schedule I-1 (Information for Global Intangible Low-Taxed Income)
Category 3, 4, 5a, 5b, 5c filers are required to file Schedule 1-1. This schedule records information needed to calculate U.S. shareholders’ GILTI. Schedule I-1 should be completed even if there is no GILTI income. The way the schedule works is the gross income is reported on Line 1 in functional currency. Then any exclusions are backed out that might apply. Keep in mind that GILTI has only been around since 2018 as part of the 2017 Tax Cuts and Jobs Act. GILTI income is this type of movable asset income such as intangible income that is not effectively connected income or Subpart F income. On Line 2 of the Form I-1 is the exclusions such as effectively connected income, high-tax exception income,
Schedule J (Accumulated E&P of CFC)
Category 1a, 4, and 5a filers are required to file Schedule J. Schedule J tracks the earnings and profits of foreign corporations. Page one of Schedule J contains 14 rows and six columns. Page two of Schedule J has 14 rows and nine columns. Column a through c is used to report Section 959(c)(3) earnings and profits. Column e(1) through e(5) is utilized to disclose Section 959(c)(1) earnings and profits. Columns e(6) through e(10) is to report Section 959(c)(2) earnings and profits. Section 959(c)(3) earnings and profits have not been taxed to the U.S. shareholder. On the other hand, Section 959(c)(1) and Section 959(c)(2) have been previously taxed. As a result, Section 959(c)(1) and 959(c)(2) are referred to as previously taxed earnings and profits or “PTEPs.” Section 959(c)(1) PTEPs only exist if the CFC had PTEPs associated with U.S. property. The most frequent type of U.S. property is a CFC loan to a U.S. shareholder or a U.S. person related to a U.S. shareholder.
Column e(9) under Section 959(c)(2) tracks Section 254A(d) PTEP. This type of PTEP is created when a CFC is owned by a U.S. corporation and the CFC receives certain hybrid dividends from another CFC. Columns e(6) and e(7) under Section 959(c)(2) deal with PTEPs created by the Section 965 transition tax. Column e(7) under Section 965(b) applied only if the U.S. shareholder owned multiple CFCs with some CFCs having positive earnings and profits and other CFCs having deficits. Column e(6) represents PTEP related to 965 transition tax. Column e(8) represents PTEP related to GILTI inclusions. Column e(9) represents PTEP related to subpart F income inclusions. These PTEP columns are the most frequently used columns.
Schedule M (Transactions between CFC and Shareholders or Other Related Persons)
Category 4 filers are required to file Schedule M. Schedule M is utilized to report intercompany transactions between the CFC and related parties.
Schedule O (Organization or Reorganization of Foreign Corporation, and Acquisition and Disposition of its Stock)
Schedule O is used to report the organization or reorganization of a foreign corporation and the acquisition or disposition of its stock. Schedule O is broken down into two parts. Category 2 filers must file Part 1 and Category II filers must file Part II. This schedule is utilized to report an organization or reorganization of a foreign corporation.
Schedule P (Previously Taxed Earnings and Profits of U.S. Shareholder of Certain Foreign Corporations)
Category 1a, 1b, 4, 5a, and 5b filers must file Schedule P. Schedule P is used to report PTEP of a U.S. shareholder of a CFC in the CFC’s functional currency and U.S. dollars.
Schedule Q
Category 1a, 1b, 4, 5a, 5b filers must file Schedule Q. This schedule is used to report a foreign corporation’s income, deductions, and assets by income groups. Schedule Q is used to disclose subpart F income in functional currency by each relevant category. This schedule also requires filers to categorize tested income into a number of different groups. Finally, filers are required to account and disclose any foreign income that was excluded from federal tax under the GILTI and subpart F high-tax exclusion.
Schedule R
Category 3 and 4 filers must file Schedule R. This schedule is used to report basic information pertaining to distributions from foreign corporations. Each filer required to complete Schedule R must disclose the amount of any money paid plus the fair market value of any property transferred to the filer from the foreign corporation reduced by: 1) any liabilities of the corporation the shareholder assumes in connection with the distribution; or 2) any liability to which the property is subject immediately after the distribution.
Conclusion
The filing category requirements associated with the Form 5471 can be incredibly complicated. Each year you 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.
Anthony Diosdi is an international tax attorney 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 other tax professionals.
He has assisted companies 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.