Own Stock of a Non-US Corporation? The IRS Wants to Know All About it

When you own stock of a non-US corporation, you're required to file IRS Form 5471, which is one of the most complicated tax forms known to man (or woman). This article discusses all of the background information you need if you're required to include an IRS Form 5471 in your return.

Written by Stewart Patton

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

  1. disregarded as a separate entity if it has only one owner or
  2. 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:

  1. IRS Form 8865 if you own a non-US partnership and
  2. 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

  1. it allows you to take the home sale exclusion on the sale of your home (assuming you otherwise qualify) and
  2. 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:

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:

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.

Ready to become an expert on this stuff? Click here to take the US Tax Masterclass for Americans Abroad (absolutely free).

Stewart Patton

I'm Stewart Patton, US tax attorney and expat entrepreneur based in beautiful Belize. Read more about me here, or email me at stewart@ustax.bz to discuss how I can help.

U.S. Tax Services, P.O Box 2651 Belize City, Belize • Belize tel: (+501) 629-6007 • U.S. VOIP: (312) 675-8571 • Email: stewart@ustax.bz

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