What you need to know about reporting foreign corporations

U.S. citizens and U.S. residents who are officers, directors, or shareholders in certain foreign corporations are responsible for filing Form 5471. If you own more than 10% of the shares of a foreign corporation, Form 5471 should be filed with your tax return. The rules and guidelines required to file this form are complicated, and carry a significant penalty if not filed on time.

The information reported on Form 5471 is a multi, six-part form. It has 11 separate schedules, including certain ownership information, income statement and balance sheet, earnings and profits, and related party transactions. There may be additional schedules that need to be filed, depending on the taxpayer’s filing category. There are four categories that determine who must file form 5471, categories 2-5 (category 1 was repealed). The form is due with the income tax return of the affected shareholder; for most corporations, that would be on March 15th. The due date for individuals is on April 15, or on June 15, if you are an expat.

Below are the typical types of categories for which you must file Form 5471:

Category 2: U.S. person who is an officer or director of a foreign corporation in which the U.S. person has acquired 10% or more stock
Category 3: A person acquires stock in a foreign corporation and meets the 10% stock ownership requirement
Category 4: A U.S. person who had control of a foreign corporation for an uninterrupted period of at least 30 days
Category 5: A U.S. shareholder who owns stock in a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and who owned that stock on the last day of the year

Investment in the United States continues to increase, and with that, comes separate filing obligations when reporting your corporation’s federal income tax return. If your company is doing business in the US market, the IRS requires that you file Form 5472, provided there are related party transactions. The form is used to disclose of intercompany sales and purchases of inventory and other assets. A domestic corporation that is at any time in the year 25% foreign-earned, will be required to file if it has reportable transactions.

Beginning with 2017, domestic disregarded entities wholly owned by foreign persons will be subject to new reporting obligations for the purpose of reporting, record-maintenance, and other compliance requirements. Such entities will now be required to obtain an EIN and to file a Form 5472 to expand the scope of reportable transactions. Such transactions include, but are not limited to, sales, contributions & advances, loans or transfers of interest to use any property or money. Failure to report Form 5472 carries steep penalties. A reporting corporation may be assessed a $10,000 penalty and the amounts accrue at a rapid pace.

There are some exceptions to filing Form 5471 and Form 5472. This article presents only a partial view on the subject. If you need help filing these forms, or need professional guidance, please let us know.