One of the best ways an expat can prosper in a foreign country is ownership in a company, either through a partnership interest or as a shareholder of the company’s stock. If an overseas company is at least 50% owned by U.S. persons, it is considered to be a controlled foreign corporation, which has important tax consequences.
If you have acquired a ten percent (10%) or greater interest in a controlled foreign corporation, you must file an informational tax return with the IRS using Form 5471. You must also include your pro rata share of the corporation’s Net Subpart F income in your taxable income each year.
You do not pay taxes when you file Form 5471. The form tracks the earnings and profits of the corporation, borrowing between the business and the taxpayer, compensation paid to the taxpayer, and distributions made to the taxpayer. Taxes related to taxpayer compensation and distributions, as well as Net Subpart F income, are reported on the taxpayer’s individual income tax return (Form 1040).
One might think that since tax payments do not accompany controlled foreign corporation returns, the taxpayer does not have to file them. This is not true, and it can be a very costly assumption. The IRS assesses a $10,000 penalty for each year the appropriate form has not been filed without reasonable cause.
Filing is complex and often laborious. The IRS estimates it takes 24 hours just to prepare the required form. That’s in addition to the estimated 16 hours it takes filers to familiarize themselves with the relevant laws. The preparer must perform currency conversions, recast the entity’s foreign financials in accordance with U.S. GAAP, track earnings and profits year to year, track acquisitions and distributions of ownership, report borrowing between shareholders and the company, calculate Subpart F income, and do much more.
At Value Plus, we have years of experience in handling complex cases. If you own a 10% interest in a controlled foreign corporation and are not familiar with the reporting requirements, contact us and let us prepare your return and reduce your tax liability.
In most cases, Form 5471 is due June 15th and accompanies your individual tax return.
1. U.S. tax law defines a U.S. person as a U.S. citizen, green card holder, partnership, corporation, estate, or trust.
2. Subpart F income is typically income that is relatively movable from one taxing jurisdiction to another and that is subject to low rates of foreign tax. Subpart F income includes insurance income as well as income falling under the classifications provided by sections 954, 951, 999, 162(c) and 901(i) of the Internal Revenue Code (IRC).