Beginning in 2012, taxpayers classified as Category 5 filers who constructively own stock of a controlled foreign corporation ("CFC") will be eligible for the constructive ownership exception from filing IRS Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, with their U.S. tax returns. Previously, the constructive ownership exception from 5471 filing was only available to Category 3 and Category 4 filers.
What is IRS Form 5471?
Form 5471 is used by certain U.S. citizens and residents who are officers, directors, or shareholders in controlled foreign corporations (as that term is defined by the Internal Revenue Code). This form must be included with the U.S. tax return to satisfy certain reporting requirements set forth in the Internal Revenue Code.
Categories of Filers
The IRS has set forth several categories of filers. Generally, any U.S. person that falls within one of these categories must file Form 5471 with the IRS. A Category 5 filer includes a U.S. shareholder who: (1) owns stock in controlled foreign corporation for an uninterrupted period of 30 days or more during the foreign corporation's tax year; and (2) owned that stock on the last day of the foreign corporation's tax year. In this respect, a Category 5 filer's stock ownership can be direct, indirect, or constructive.
Prior to 2012, Category 5 filers who indirectly owned stock of a CFC were required to file Form 5471 with their U.S. tax returns, notwithstanding the fact that they did not actually own any stock of the CFC. However, going forward, Category 5 filers who do not directly own stock of a CFC may be exempt from filing Form 5471 under the constructive ownership exception. This change comes via revised form instructions for Form 5471 published by the IRS on January 18, 2013. The extension of the constructive ownership exception to Category 5 filers should reduce compliance burdens for many taxpayers and should reduce administrative burdens for the IRS.
To qualify for the exception, a Category 3, 4, or 5 filer must satisfy each of the following requirements:
(1) the U.S. person must have no ownership of a direct interest in the foreign corporation;
(2) the U.S. person must be required to furnish the information requested solely because of constructive ownership through another U.S. person; and
(3) the U.S. person through whom the indirect shareholder constructively owns an interest in the foreign corporation must file Form 5471 to report all of the required information.
As a final matter, it should be noted that Category 5 taxpayers who qualify for the constructive ownership exemption from filing Form 5471 going forward should also be exempted from filing IRS Form 8858 for foreign disregarded entities (FDEs) owned by the CFC because the constructive ownership exception exempts such taxpayers from filing Form 8858.