What is a Non-US Corporation?
A non-US corporation is simply a legal entity formed under the laws of a country outside the US that is classified as a corporation for US tax purposes. The US tax rules determine whether an entity is a corporation or not for US tax purposes—the name of the entity and its treatment under local law do not control for this purpose.
For US tax purposes, a non-US entity is classified as a corporation by default if all of its owners have limited liability. Since that’s almost always the case, almost all non-US entities are corporations by default.
In the unlikely event any owner has unlimited liability, the entity is either
- disregarded as a separate entity if it has only one owner or
- treated as a partnership if it has more than one owner.
This is only the default classification. Almost all types of non-US entities can elect a different treatment for US tax purposes by filing IRS Form 8832. An entity with one owner can elect disregarded entity treatment, and an entity with more than one owner can elect partnership treatment. The best US classification for your non-US entity will depend on how you use that entity-it’s a matter that you should discuss with a qualified tax professional.
For example, if you and your spouse each own 50% of the interests of a Belize limited liability company, then the Belize LLC is treated as a corporation for US federal income tax purposes by default (because all members have limited liability). However, it can elect to be classified as a partnership for US tax purposes by filing IRS Form 8832.
Can I avoid IRS Form 5471 by causing my non-US company to elect Partnership or Disregarded Entity Treatment?
Yes, you absolutely can. But there are different forms you’d have to file that are almost equally as burdensome.
You generally have to file:
- IRS Form 8865 if you own a non-US partnership and
- IRS Form 8858 if you own a non-US disregarded entity.
So, making an entity classification election just to avoid the IRS Form 5471 would be a classic “out of the frying pan, into the fire” situation. Plus, of course there could be substantive differences to the US tax treatment of the activity you hold through the company.
Who is the Owner of a Non-US Corporation?
The US tax rules treat you as the owner of a non-US corporation if you have the “benefits and burdens” of ownership. That is, if you put the assets into the company, expect to receive those or different assets upon liquidation of the company, and have the ability to direct the disposition of stock of the company.
I very often see variations on the following fact pattern: an American forms a non-US corporation and transfers assets to it, the corporation has bearer shares that are held by the law firm or company that formed the corporation, and the American is only a director or administrator of the corporation. Sometimes these folks believe they aren’t required to file the IRS Form 5471 because they do not own the stock of the non-US corporation.
The US tax rules look through the form of a transaction to its actual substance. If you put assets into a corporation, you have control over the assets and the affairs of the corporation, and you’re the one who will own those assets once they come out of the corporation, then you own the corporation for US tax purposes, even if all of the shares are signed bearer shares gathering dust in a lawyer’s filing cabinet.
What if my Corporation owns only my Home?
You still need to file an IRS Form 5471 (because you own the stock of a non-US corporation). However, I believe it’s reasonable to take the position that you own the house directly for US tax purposes (and your non-US corporation owns nothing). Living in the house converts a corporate asset to a personal use, which is treated as a distribution of the asset to you from the corporation.
This position is beneficial because
- it allows you to take the home sale exclusion on the sale of your home (assuming you otherwise qualify) and
- it avoids thorny issues about imputed rent between you and your corporation.
But (to repeat myself), you still have to file an IRS Form 5471.
Categories of Filers
The IRS Form 5471 must be filed by anyone who falls into one of the four filing categories, and the instructions dictate the information that must be provided by filers in each category. If a person is described in more than one filing category, they’re required to include all of the information that must be provided by both filing categories.
The filing categories and general description of information that must be provided are as follows:
- Category 1: This filing category has been repealed—it only exists as a ghost so that the IRS doesn’t have to re-number everything.
- Category 2: This category includes US persons who are officers or directors of a foreign corporation in a year when a US person acquires 10% or more of its stock. Category 2 filers must disclose only the bare bones—identifying information about the corporation and US acquirer.
- Category 3: This category generally includes US persons who themselves acquire at least 10% of the stock of the foreign corporation or sell down so that they own less than 10%. Category 3 filers must disclose lots of information, including (i) an income statement, (ii) an opening and closing balance sheet, and (iii) the identity of other US shareholders.
- Category 4: This category includes US persons who own more than 50% of the stock of the foreign corporation. Category 4 filers must disclose (i) everything required to be disclosed by Category 3 filers and (ii) additional information regarding the corporation’s undistributed earnings and transactions between the corporation and related persons.
- Category 5: This category includes US persons who own at least 10% of the stock of a “controlled foreign corporation,” which is generally a foreign corporation where US persons own more than 50% of the stock. Category 5 filers generally must only provide identifying information about the corporation and information regarding undistributed earnings; they are not required to provide income statements and balance sheets or identify other US shareholders.
Additional Notes and Planning Opportunities
As you can see from the brief outline above, part of the complication with the IRS Form 5471 is in determining which filing category a taxpayer falls into. Here are some additional issues that frequently crop up in this area:
- A taxpayer must separately determine which filing category they fall into in each taxable year. For example, a person who owns 20% of a “controlled foreign corporation” will generally be a Category 5 filer, but they will be a Category 3 filer in the year they acquire their stock and the year they sell their stock.
- Complicated attribution rules apply to determine how much stock a person owns. For example, a person is treated as owning the stock owned by his or her family. So, if a husband and wife each own 50% of the stock of a foreign corporation, then they’re both Category 4 filers because they’re each treated under the attribution rules as owning 100% of the stock.
- With proper planning, it’s sometimes possible to move to a more favorable filing category or eliminate the filing requirement altogether. For example, an American whose spouse is not a US citizen or resident can avoid filing an IRS Form 5471 by having the spouse own 100% of the foreign corporation. The attribution rules do not apply when a US person doesn’t own any stock directly).
Warning: The IRS Form 5471 is not for Do-it-Yourselfers
The IRS Form 5471 uses all sorts of jargon and cross-references that just aren’t understandable by folks other than tax professionals.
For example, to properly complete the IRS Form 5471, you must know whether the corporation “participated in a reportable transaction as defined in Treasury Regulations section 1.6011-4” or “paid any foreign tax that was disqualified for credit under Section 901(m) of the Code.” If that’s Greek to you, then it just gets worse, because you also need to know if the foreign corporation is a “DASTM corporation” and how much “Subpart F income” the corporation realized.
Additionally, note that the IRS can impose a penalty of $10,000 per year for failing to include any required information in an IRS Form 5471 (or failing to file the form altogether). So, if you don’t correctly identify which filing category you fall into, or you leave off a schedule that was required to be included, your oversight could cost you $10,000.
For your mental health and financial safety, please leave the IRS Form 5471 to us tax geeks.
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