Foreign Corporation that is not a PFIC- Form 5471
At Focused Tax Strategies, we feel obligated to inform our US clients about their obligations to file form 5471, failing which they could be liable for significant fines and exposure to life-long audits. Given the complexity of these situations, we are NOT accepting clients who need a 1040 and/or state return who own 10% or more of a foreign corporation or trust. Our knowledge on this topic is inadequate and we always recommend the client seek guidance from a cross-border tax expert
BC or Canadian Incorporated Companies or Trusts
U.S. persons are always required to file Form 5471 related to their ownership in a foreign corporation when their ownership exceeds 10%. To determine your ownership interest percentage in a foreign corporation, you need to consider your direct, indirect, and constructive ownership in the entity.
Extensive reporting on Form 5471 is required for Taxpayers with ownership in a foreign corporation that is a Controlled Foreign Corporation (“CFC”). A foreign corporation is considered to be a CFC if it is more than 50% owned by U.S. shareholders. U.S. shareholders are U.S. persons (U.S. citizens or residents, domestic partnerships, domestic corporations, or non-foreign estates or trusts) that own 10% or more of the stock of a foreign corporation by vote or value.
The information required to be reported on Form 5471 depends on whether the foreign corporation is a CFC and the Taxpayer’s ownership percentage in the CFC. A Taxpayer with control (>50% ownership) over a CFC, is generally required to report all financial information related to the foreign corporation including an income statement, balance sheet, related party transactions, and information on the purchase and sale of the entity.
A $10,000 penalty per Form 5471 may be imposed for every year the Taxpayer fails to furnish the required information by the due date of the tax return.
Passive Foreign Investment Corporation
A PFIC generally is any foreign corporation if: (1) at least 75% if its gross income for the year is passive; or (2) at least 50% of the assets it held during the year produce passive income or are held for the production of passive income. Common types of passive income may include rent, royalty, dividends, and interest. PFICs are commonly found as investments in foreign mutual funds or owned through investment partnerships. Special rules apply to PFICs when they make distributions to U.S. persons or if a U.S. person sells an interest in a PFIC. The taxation of income related to PFIC stock is complex and generally punitive compared to regular rules.