A category 5 filer has similarities in definition to category 1, but pertains more to controlled foreign corporations (CFCs). A category 5 filer includes a U.S. shareholder who owns stock in a foreign corporation that is a CFC( at any time during any tax year) and who owned that stock on the last day of the year which it was a CFC.
For category 5 filers, a U.S. shareholder is defined as one who either:
- 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 a CFC 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 a CFC; or
- Owns (either directly or indirectly, within the meaning of section 958(a)) any stock of a CFC (as defined in sections 953(c)(1)(B) and 957(b)) that also is a captive insurance company.
As you can see it follows a similar definition for U.S. shareholders as category 1 (except for captive insurance companies) and is generally for those over 10% ownership in voting power before 2017, or either 10% voting power thereafter. 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).
See section 957(c) for exceptions.
If you meet the 10% threshold of share ownership and belong to one of the four categories of U.S. persons, then you should check if the foreign corporation was categorized as a CFC anytime during the year. A CFC in terms of category 5 is defined as:
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 stock classes or more than 50% of the total value of the foreign corporation’s stock.
Certain Category 1 and Category 5 Filers
There are some relief options for certain category 1 and 5 filers (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
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
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.|
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 5, as you would not be required to file
Separate schedule H (current earnings and profits), separate schedule J (Accumulated Earnings & Profits of CFC) and separate schedule P (Previously taxed earnings and profits of U.S. shareholders of certain FCs).
Filing Requirements for Category 5 filers
|No.||Category 5||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 2||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||Schedule G||Separate Schedule I-1||Separate Schedule I-1|
|6||Separate Schedule H||-||-|
|8||Separate Schedule I-1||-||-|
|9||Separate Schedule J||-||-|
|10||Separate Schedule P||-||-|
The information section outlines basic information about the foreign corporation, Schedule B (U.S. shareholders of the foreign corporation), Separate Schedule E (the company’s income and profits taxes paid or accrued), Schedule E-1 (taxes paid for E&P), Schedule I-1 (GILTI), Schedule G (Other information), Schedule H (current earnings and profit) Separate Schedule J (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 5 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.