US persons who have ownership interests in foreign corporations, or who are directors or officers of foreign corporations, are subject to special reporting rules. The first article of this series provided the general reporting requirements under Form 5471; the second article of this series about the reporting requirements of “Category 2 Filers”, which are the reporting requirements of a US citizen or resident who is an officer or director of a foreign corporation; which was followed by the third article about the reporting requirements of “Category 3 Filers”, which are the reporting requirements that are generally triggered when US persons acquire and dispose of stock in a foreign corporation. This article will focus on the reporting requirements of “Category 4 Filers”, which are the reporting requirements of a US person in control of a foreign corporation.
A Category 4 Filer is a US person who, for at least an uninterrupted period of 30 days during the annual accounting period of the foreign corporation, owned more than 50% of the foreign corporation by value or vote (“50% Stock Ownership Requirement”). For purposes of a Category 4 Filer, a US person is defined as a citizen or resident of the US, a nonresident alien who elects to be treated as a US resident taxpayer, a domestic partnership, corporation, estate or trust.
In determining whether a US Person meets the 50% Stock Ownership Requirement, certain constructive ownership rules apply. US persons are considered to own stock owned by their spouses, children, grandchildren, and parents. Stock considered to be owned by a US person by reason of a family relationship is attributed only once. In other words, the family relationship does not cause each member’s stock to be attributed to all of the others in sequence. If stock is attributed by reason of one of the relationships referenced above, say from a wife to her husband, the stock attributed to the husband cannot be attributed to others by reason of their relationship to the husband. In contrast to Category 2 and 3 attribution rules, the Category 4 attribution rules are more limited because there is no attribution from siblings or grandparents.
Stock of a foreign corporation owned by a partnership or estate is considered to be owned proportionately by its partners and beneficiaries. Stock of a foreign corporation owned by a trust (with certain exceptions) is considered to be owned by the beneficiaries in proportion to their actuarial interest in the trust. Stock of a foreign corporation owned by a grantor trust is considered to be owned by the owner of the grantor trust.
A US person who is in control of a corporation, pursuant to the 50% Stock Ownership Requirement, will be treated as in control of any controlled subsidiary. Furthermore, if a US person owns 10% or more of the value of a corporation, then the US person is considered to own the same percentage of the stock of any foreign corporation that is in turn owned by that corporation.
In determining the 50% Stock Ownership Requirement, attribution to entities, trusts, or estates cannot be used to make a US person a constructive owner of stock owned by a non-US person.
There are certain exceptions to filing under Category 4. If more than one US person is required to file as a Category 4 Filer with respect to the same foreign corporation, the filing requirement may be satisfied by one US person filing the required form.
A US person in control of a foreign corporation is not required to file as a Category 4 Filer if (1) the US person has no direct interest in the foreign corporation, (2) is within Category 4 solely by reason of constructive ownership from another US person, and (3) that other US person files a Form 5471 that includes all information required of a Category 4 Filer. In other words, this exception relies on a third party to include all of the required information of a Category 4 Filer. The conservative approach of a US person who qualifies for this exception would be to make a protective filing under these circumstances to avoid any penalties being assessed due to reliance of another US person’s filing. As described below, the penalties for non-filing can be significant.
Also, a Category 4 Filer is not required to file Form 5471 with respect to a foreign corporation if such person (1) has no direct or indirect interest in the foreign corporation, and (2) would be required to file as a Category 4 Filer solely because of constructive ownership from a nonresident alien. This provides an exemption for US persons who are attributed control of a foreign corporation solely through family attribution rules from foreign family members and have no direct or indirect ownership interest in the foreign corporation.
The penalties for failing to file as a Category 4 Filer are significant. There is a penalty of $10,000 for failure to furnish the information for each annual accounting period missed. If the failure continues after being notified, there is an additional $10,000 penalty for each 30 day period the failure continues.