Exceptions from Filing Form 5471
With a basic understanding of the information and categories in form 5471, the filing requirements can often be a bit overwhelming. Even after identifying which category you and possibly the other US shareholders are in the foreign corporation (FC), there are numerous schedules and separate schedules which must be filed accurately to avoid any form 5471 penalties.
That is why in addition to dormant foreign corporations (which can opt for a summary page 1 filing), there are other exceptions from filing form 5471 for certain category filers. Many of these exceptions revolve around the category shareholder not owning a direct/indirect interest, foreign controlled CFCs, or joint filing. Therefore once you have an idea about what type of category file you fit in, you can sort through the different filing exceptions.
Here are the common exceptions from filing:
| Exception | Category | Condition 1 | Condition 2 | Condition 3 |
|---|---|---|---|---|
| 1 | Categories 1,3,4,5 | The shareholder does not own a direct interest in the FC; | The shareholder is required to furnish the information requested solely because of constructive ownership (as determined under Regulations section 1.958-2, 1.6038-2(c), or 1.6046-1(i)) from another U.S. person; | The U.S. person through which the shareholder constructively owns an interest in the FC files Form 5471 to report all of the required information. |
| 2 | Categories 1,4,5 | Does not own a direct or indirect interest in the FC, | Is required to file Form 5471 solely because of constructive ownership from a nonresident alien. | - |
| 3 | Categories 1,5 | The filer is a U.S. shareholder that owns stock, within the meaning of section 958(b), in the FC; | The filer is not related, using principles of section 954(d)(3), to the FC; | The foreign corporation is a foreign-controlled CFC. |
| 4 | Categories 1,5 | No U.S. shareholder (including such U.S. person) owns, within the meaning of section 958(a), stock in the foreign corporation on the last day in the year of the foreign corporation in which it was an SFC or CFC, and the foreign corporation is an SFC or CFC solely because one or more U.S. persons is considered to own the stock of the foreign corporation owned by a foreign person under section 318(a)(3). | ||
| 5 | Category 2 | Immediately after a stock acquisition, three or fewer U.S. persons own 95% or more in value of the outstanding stock of the foreign corporation and the U.S. person making the acquisition files a return for the acquisition as a Category 3 filer, | ||
| 6 | Category 2 | The U.S. person(s) for which the Category 2 filer is required to file Form 5471 does not directly own an interest in the FC but is required to furnish the information solely because of constructive stock ownership from a U.S. person and the person from whom the stock ownership is attributed furnishes all of the required information | ||
| 7 | All Categories | One person may file Form 5471 and the applicable schedules for other persons who have the SAME FILING REQUIREMENTS. If you and one or more other persons are required to furnish information for the same FC for the same tax year, a joint information return containing the required information may be filed with your tax return or with the tax return of the other persons | ||
It’s important to carefully identify which category filer you are and if you fit the requirements for the exceptions to filing. Otherwise you may face possible penalties (starting from $10,000 and upwards of $50,000 for non-filings) for failing to file a form 5471 information return when you were required to. It’s best to seek advice from a professional lawyer or tax accountant for these.
Conclusion
Understanding the requirement of each of these exceptions for all form 5471 category filers is important as you may be exempt from having to file this complex form. However as many of these requirements may be subject to several conditions and certain exceptions, it’s always recommended to seek professional tax advice before you make your final decision. If you need more information about form 5471, contact us.
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