International Tax

Controlled Foreign Corporations

The Controlled Foreign Corporation (CFC) rules, including Subpart F, were designed to prevent U.S. citizens, resident individuals, and entities from deferring tax through the use of foreign entities. Prior to these rules, U.S. citizens, resident individuals, and entities could form offshore corporations in tax havens and move income, such as interest, dividends, rent, royalties, and sales and services income, to those subsidiaries where they would either not be taxed or taxed at a very low rate.

A CFC is defined as any corporation organized outside the U.S. that is more than 50% owned by U.S. Shareholders. A U.S. shareholder is any individual or entity that owns 10% or more of the foreign corporation. If you are considered a U.S. shareholder you are likely required to file Form 5471 annually as part of your tax return.

There are four categories of individuals or shareholders that may be required to file this form:

• A U.S. person who is an officer or director of a foreign corporation in which any U.S. person owns or acquires 10% or more of the stock of the foreign corporation.
• A person who becomes a U.S. person while owning 10% or more of the stock of the foreign corporation.
• A U.S. person who had control of a foreign corporation for at least 30 days during the accounting year of the corporation
• A U.S. shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for an uninterrupted period of at least 30 days during the tax year and who owned that stock on the last day of that year.

The rules governing CFCs are extremely complex and the form(s) can be very confusing. The Esquire Group tax advisors will guide you through the process and ensure that you have provided all of the necessary information. Form 5471 requires extensive information which includes a comprehensive balance sheet and income statement with conversions from foreign currencies to the U.S. dollars using GAAP. Failure to file or an inaccurate filing of Form 5471 can result in substantial penalties and an indefinite statute of limitations for audit purposes.

In addition to Form 5471, if you transferred property, including cash, to a foreign corporation you are likely required to file Form 926.