What is a foreign corporation?
A foreign corporation is an entity incorporated outside the United States according to the laws of the foreign country where formed. A corporation organized in Guam, American Samoa, the Northern Mariana Islands or the Virgin Islands is not considered foreign for US tax purposes.
What is a controlled foreign corporation?
A CFC is a foreign corporation that has U.S. shareholders that own (directly, indirectly, or constructively any day of the tax year of the foreign corporation more than 50% of the voting power of its stock.
Is there a filing requirement?
The Internal Revenue Service imposes filing requirements on US persons based on four categories of filers. These categories vary according to whether the foreign entity is a controlled foreign corporation or merely a foreign corporation that is not controlled. In either category, information return Form 5471 - Information Return of US Persons With Respect to Certain Foreign Corporations - is the required filing.
Who is a US person?
A US person is:
What if I don't file?
The failure to file Form 5471 is $10,000 for each failure to file plus additional $10,000 penalties after 90 days for each 30 day delay up to $50,000. The $10,000 penalty also applies to Schedule O of the 5471 form. Finally loss of the Foreign Tax Credit can significantly affect US tax liability if the 5471 is not filed.
What are the categories of filers?
Family members or US persons who independently own 10% or more of the voting stock of a foreign corporation are included in determining percentage ownership. Two or more members of a family could together own more than 50%, resulting in control of the foreign corporation. A 50% owner of a U.S. corporation or partnership that owns shares in a foreign corporation is considered as owning those shares for purposes of control. Shareholders in a CFC are subject to more stringent taxation even if such ownership of shares only occurred for 30 days during the taxable year.
Form 5471 - If you own more than 10% of the shares in a controlled foreign corporation, you are required to file this form annually. It must accompany your tax return. If your ownership of the total combined voting power of all classes of stock or total value of all shares exceeds 50%, you are deemed to have control over the corporation and will therefore have to include your share of subpart F income on your return. IRS will attribute ownership of shares to related parties. For instance, if you and a family member together own over 50%, then you will be considered to have control over the corporation. Failure to file this complex information return can incur a penalty of $10,000 per return. In some cases, criminal penalties may be sought.
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