Category 4 Filer

Category 4 is for U.S. persons who had a majority of the shares of the company (over 50%) or otherwise defined as control of the foreign corporation, during the annual accounting period. As the filer was a significant shareholder of the company with the power to dictate the decision of the foreign corporation, thus the form 5471 filing requirements of category 4 filers is the most severe.

For category 4 filers, the definition of a U.S. person is expanded to 6 different types of entities/individuals to include nonresident aliens in certain situations.

The 6 different types include:

• A citizen or resident of the United States;
•  A nonresident alien for whom an election is in effect under section 6013(g) to be treated as a resident of the United States; 
• An individual for whom an election is in effect under section 6013(h), relating to nonresident aliens who become residents of the United States during the tax year and are married at the close of the tax year to 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 1.6038-2(d) for exceptions.

The subject of control is also covered with category 4 filers, which does not pertain to the other types of filers. Thus in general if you had over 50% ownership of the foreign corporation, there is a high chance that you will fall under this category of the filer.

Control in this sense for a U.S. person of a foreign is defined as owning stock (at any time during the person’s tax year) which possesses:

More than 50% of the total combined voting power of all classes of stock of the foreign corporation able to vote or more than 50% of the total value of all shares (all share classes) of the foreign corporation. 

Note: A person in control of a corporation that owns more than 50% of the combined voting power or value of all classes of stock of another corporation is also treated as having control of that corporation. 

This is an important definition of “control” as it also covers groups of companies whereas a parent company controls many subsidiaries and thus must report their holdings in foreign corporations as well.

For instance if a Corporation A owns 51% of the voting stock in Corporation B, and Corporation B owns 51% of the voting stock in Corporation C, and Corporation C owns 51% of the voting stock in Corporation D, then Corporation A would have control over Corporation D.

For more details on “control”, see Regulations sections 1.6038-2(b) and (c). 

Filing Requirements for Category 4 filers

The filing requirements and required schedules for category 4 filers is the most extensive among all form 5471 categories of filers, as having control of the foreign corporation means having the most power and responsibility over the company’s operations and assets.

The filing requirements are as:

The required schedules encompass nearly all available form 5471 sections and schedules, except for separate schedule O. For category 4 filers you may want to explore the option of bulk filing for multiple filers as the required information may overlap the schedules of other filers.

Conclusion

After reviewing the definitions of Category 4 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.