A category 1 filer includes a U.S. shareholder of a foreign corporation (FC) that is a section 965 specified foreign corporation (SFC) at any time during any tax year of the FC, and who owned that stock on the last day of the year which it was a SFC (taking into account the regulations under section 965). In simple terms, this is for U.S. shareholders of companies that were SFC or CFCs, ie. foreign companies that were controlled (over 50% ownership) by U.S. shareholders or a foreign company owned by domestic U.S. corporations.
For Category 1 filers, a U.S. shareholder is defined as:
A U.S. shareholder is a U.S. person who owns (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) 10% or more of the total combined voting power of all classes of voting stock of an SFC or, in the case of a tax year of a foreign corporation beginning after December 31, 2017, 10% or more of the total combined voting power or value of shares of all classes of stock of an SFC.
As you can see it defines U.S. shareholders as generally having over 10% ownership in voting power before 2017, or either 10% voting power or value in 2018 onwards. It also goes on to layout 4 different types of entities which can be defined as a U.S. person, as:
- A citizen or resident of the United States
- A domestic partnership
- A domestic corporation, and
- An estate or trust that is not a foreign estate or trust as defined in section 7701(a)(31)
If you meet the requirements of the 10% threshold of share ownership and also belong to one of the four categories of U.S. persons, then you should check if the foreign corporation was categorized as a Specified Foreign Corporation (SFC) anytime during the year. A SFC in terms of category 1 is defined as:
1. Being a CFC, which is a foreign corporation that has U.S. shareholders that own (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) on any day of the tax year of the foreign corporation, more than 50% of:
- The total combined voting power of all classes of its voting stock, or
- The total value of the stock of the corporation.
2. Any foreign corporation with one or more domestic corporations being a U.S. shareholder. However, if a passive foreign investment company (as defined in section 1297) with respect to the shareholder is not a CFC, then such corporation is not an SFC.
See section 965 and the regulations thereunder for exceptions.
Certain Category 1 and Category 5 Filers
There are some relief options (reduced form 5471 filings) for certain category 1 and 5 filers, which is outlined in Rev. Proc. 2019-40. These special categories mainly have to do with being an unrelated U.S. shareholder of the foreign corporation or having related but constructive ownership. They are thus deemed as “Unrelated section 958(a) U.S. shareholder” and “Related constructive U.S. shareholder”.
Unrelated section 958(a) U.S. shareholder
For purposes of Category 1 and Category 5, an unrelated section 958(a) U.S. shareholder is a U.S. shareholder with respect to a foreign-controlled corporation who:
- Owns, within the meaning of section 958(a), stock of a foreign-controlled corporation; and
- Is not related (using principles of section 954(d)(3)) to the foreign-controlled corporation.
Related constructive U.S. shareholder
For purposes of Category 1 and Category 5, a related constructive U.S. shareholder is a U.S. shareholder with respect to a foreign-controlled corporation who:
- Does not own, within the meaning of section 958(a), stock of the foreign-controlled corporation; and
- Is related (using principles of section 954(d)(3)) to the foreign-controlled corporation.
Here are the two conditions for each type of special categories per the table below:
|Name||Condition 1||Condition 2|
|Unrelated section 958(a) U.S. Shareholder||Owns, within the meaning of section 958(a), stock of a foreign-controlled corporation;||Is not related (using principles of section 954(d)(3)) to the foreign-controlled corporation.|
|Related Constructive U.S. Shareholder||Does not own, within the meaning of section 958(a), stock of the foreign-controlled corporation;||Is related (using principles of section 954(d)(3)) to the foreign-controlled corporation.|
It’s important to note that many of these categories follow definitions to sections of tax law, so its also suggested to seek advice from a tax professional for further information about your particular situation.
Having said that, if you do fall under these two categories, you would have a greatly reduced form 5471 filing requirements as compared to category 1, as you would not be required to file separate schedule J (Accumulated Earnings & Profits of CFC) and separate schedule P (Previously taxed earnings and profits of U.S. shareholders of certain FCs).
The filing requirements for category 1 filers for these three possible scenarios are:
|No.||Category 1||Unrelated Section 958 (a) U.S. Shareholder||Related Constructive U.S. Shareholder|
|1||Information Section of Page 1||Information Section of Page 1||Information Section of Page 1|
|2||Schedule B, Part 1||Separate Schedule E||Schedule B, Part 1|
|3||Separate Schedule E||Schedule E-1 (included with separate Schedule E)||Separate Schedule E|
|4||Schedule E-1 (included with separate Schedule E)||Schedule I||Schedule G|
|5||Separate Schedule J||Separate Schedule I-1||Separate Schedule I-1|
|6||Separate Schedule P||-||-|
The information section outlines basic information about the foreign corporation (like address, tax year, names of filers, etc.), Schedule B is for U.S. shareholders of the foreign corporation, Separate Schedule E is for The company’s income and profits taxes paid or accrued, Schedule E-1 for taxes paid for E&P, Schedule I-1 for GILTI, Schedule G for other information, Separate Schedule J for E&P of CFCs, and Separate Schedule P for previously taxed earnings of U.S. shareholder of certain foreign corporations.
After reviewing the definitions of Category 1 filers, you may be able to determine if you fall under this category and what possible form 5471 filing requirements you may have. Also be sure to check out the exceptions from Filing Form 5471 to see if you fit any of these requirements to avoid this tax filing. Of course it’s better to double confirm any results you have with a tax professional before making any final decisions on this tax filing. If you need more information about form 5471, contact us.
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