Category 2 filers have the least amount of form 5471 requirements among all the filers, as these are defined for only the officers/directors of the foreign corporation (not for shareholder filings). However, they still need to conduct a filing to report the shareholding of U.S. persons throughout the year.
A category 2 filer includes a U.S. citizen or resident who is an officer or director of a foreign corporation, which a U.S. person has acquired:
- Stock which meets the 10% stock ownership requirement in the foreign corporation, or
- An additional 10% or more (in value or voting power) of the stock of the foreign corporation.
A U.S. person has acquired stock in a foreign corporation when that person has an unqualified right to receive the stock, even though the stock is not actually issued.
See Regulations section 1.6046-1(f)(1) for more details on definitions, exceptions and examples.
The paragraph above outlines problems with the actual ownership of the stock and it having it indirectly or constructly, such as the shares owned by a spouse or having stock options or warrants not originally issued.
For purposes of Category 2 and Category 3, the 10% stock ownership requirement and threshold is met if a U.S. person owns 10% or more of the total value or voting power of all classes of stock. Therefore in cases of ownership of preferred shares, these U.S. shareholders may qualify for one of the requirements of the 10% stock ownership requirement.
The four criteria for being a U.S. person is also similar to that of category 1, which are:
- 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)
See Regulations section 1.6046-1(f)(3) for exceptions
Filing Requirements for Category 2 filers
If you meet all the requirements for being a category 2 filer, you’re in luck, as the amount of filing for this type of filer is significantly less than the other types. The required sections and schedules for category 2 filers are as:
|1||Information Section of Page 1|
|2||Separate Schedule O, Part 1|
Page 1 consists of the basic information about the company, its shareholders and location of its business. Separate schedule O pertains to mode detailed information about the U.S. shareholders, their acquisitions/dispositions of stock and any other company reorganizations.
After reviewing the definitions of Category 2 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.
And if you need help managing your foreign company’s shares, check out this online share management software at Eqvista.