Tax Implications of Owning an Interest in a Foreign Corporation
The international business environment has substantially changed over the past several years. The IRS and the US Justice Department are tightening reporting and taxation of those with offshore corporate ownership and offshore assets, investments and accounts. It is important to come into full compliance with FBAR reporting requirements as well as disclosures required on IRS form 8938.
US taxpayers have deployed foreign corporations in an attempt to defer taxation in the past. Due to recent changes brought about primarily by FATCA, if you own an interest in a foreign corporation or company, there are significant reporting requirements relating to your ownership interests and the financial activities of your company.
If you have an offshore company, or you own a controlling interest or any portion of a foreign corporation, you are required to disclose your ownership position within the company at the end of each calendar year, and provide informational disclosures pertaining to income and balance sheet reports. You may be required to file IRS Form 5471, the “Information Return of U.S. Persons With Respect to Certain Foreign Corporations.” There are complex attribution aspects of US tax laws that mean a taxpayer can have an “attributed” or “constructive” ownership in a foreign corporation even though they don’t have an actual (or indirect) ownership in the company. The failure to file the Form 5471 can expose the taxpayer to extensive penalties for being non-compliant.
Categories of Foreign Corporate Ownership – IRS Form 5471
Category 2 Filers
A US citizen or resident who is an officer or a director of a foreign corporation is required to be a Category 2 filer if any US resident or citizen, domestic partnership, estate, trust or corporation (termed a “US Person” in the form) has purchased 10% or more stock ownership by “value or vote.” Category 2 filers are required to report ownership interest acquisitions by a US Person in the foreign corporation regardless of whether the Category 2 filer has an ownership interest in that foreign corporation or not. Category 2 filers must not only know and identify those who have “constructive” ownership in the company, but those who have actual or indirect ownership in the company.
Category 3 Filers
A US taxpayer is required to file form 5471 under category 3 when they already own stock and acquire an additional interest which accumulates to 10% or more of the stock of a foreign corporation. If someone who already meets the “10% Stock Ownership Requirement” becomes a “US Person” they would be required to file form 5471 under this category.
Category 4 Filers
If you are a “US Person” and owned more than 50% of a foreign corporation’s stock for an uninterrupted period of 30 days or more during the fiscal year of the company, you are required to file form 5471 under this category. There are different “constructive ownership” rules under category 4 than in other categories of the form.
Category 5 Filers
US shareholders who own stock in a foreign corporation that is defined as a “Controlled Foreign Corporation” or CFC for 30 days uninterrupted during the fiscal tax year of the foreign corporation, and owned stock on the last day of that tax year would be category 5 filers. A CFC is defined as a foreign corporation where US shareholders own or control more than 50% of the CFC.
Contact the Experienced International Tax Attorneys at Allen Barron if You Own an Interest in a Foreign Corporation or have Questions About Offshore Corporate Ownership
The nature of international taxation and reporting requirements for owners of any interest in a foreign corporation or company, or who may have an attributed ownership interest in a foreign entity, have become quite complex. More importantly, the penalties for failing to file Form 5471 when required exposes US taxpayers to significant financial penalties and potential criminal tax liabilities.
If you own an interest in a foreign corporation or a “Controlled Foreign Corporation” or CFC, the Form 5471 can be quite complex and often confusing. It is important to contact the experienced tax attorneys at Allen Barron for a complimentary and substantive consultation at 866-631-3470. We will discuss the nature of your constructive or attributed ownership of foreign corporate interests, and develop a strategy to ensure compliance and minimize your tax exposure.