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March 9, 2017 - Haoshen Zhong

When You Have to File Both Form 5471 and Form 8621

Filing Form 5471 and Form 8621 for the same foreign corporation

This is a question that we get a lot:

If I own shares in a foreign corporation, and I file Form 5471, then I do not have to file Form 8621, right?

The answer to this question is “incorrect”. There are situations under which you have to file both Form 5471 and Form 8621 to report the same corporation. Here are a few common situations we have seen arise in the course of our work.

Background to Form 8621 and Form 5471

Form 8621 is a form that US persons use to report investments in passive foreign investment companies (PFICs). Form 8621 instructions, 1. It is not important for this post to know what a PFIC is. We need only know that a PFIC is a type of foreign corporation subject to special treatment under US tax law. For this post, we assume all foreign corporation we discuss satisfy the PFIC definition.

Form 5471 is a form that US persons use to report US ownership in foreign corporations. There are 5 categories of filers, each with different conditions for filing and different information that must be provided. The exact filing requirements are not important for this post, but we make references to the requirements when necessary.

The source of the confusion is an overlap rule for controlled foreign corporations and PFICs

Congress has adopted 2 sets of rules to discourage US persons from using foreign corporations to defer tax. One set applies to controlled foreign corporations (CFCs), and the other set applies to passive foreign investment companies (PFICs). It is possible for a foreign corporation to satisfy both the CFC definition and the PFIC definition.

When a foreign corporation satisfies both the CFC definition and the PFIC definition, a CFC-PFIC overlap rule applies. The CFC-PFIC overlap rule states that if you are a US person who owns at least 10% of the voting power of a CFC, then you do not treat your shares in the CFC as shares in a PFIC, even if the CFC meets the definition of a PFIC. IRC §1297(d).

If you are a US persons who owns at least 10% of the voting power of a controlled foreign corporation (CFC), then you have to file Form 5471 under category 5. Form 5471 instructions, 2. You fall under the CFC-PFIC overlap rule. The general result is that you do not treat your shares in the CFC as PFIC shares, so you do not file Form 8621.

One conclusion that I have seen taxpayers draw is that if he has to file Form 5471 to report a foreign corporation, then it is not necessary to file Form 8621 as well. There is no such exception in general. Only those who fit under the CFC-PFIC overlap rule can avoid filing both.

Here are some common situations we have seen where a US person must file both forms. These are not exhaustive, just what we have seen.

US persons who acquire shares in a non-CFC

Category 3 filers of Form 5471 are US persons who acquire or dispose of enough shares in a foreign corporation. I will not list all the ways you can become a category 3 filer. But one way have a category 3 filing requirement is to start with no shares and acquire at least 10% of the shares. Form 5471 instructions 1.

Suppose you are a US person who joins an investment venture with 3 unrelated nonresident aliens. You incorporate a foreign corporation, and each of you takes 25% of the shares.

You must file Form 5471 under category 3 to report your acquisition of the 25% of shares, but do you fall under the CFC-PFIC overlap rule?

A CFC is a foreign corporation in which 10% voting US shareholders own more than 50% of the shares (by voting power or by value). IRC §957(a).

You own 25% of the shares of a foreign corporation. Nonresident aliens own the other 75%. There is only one 10% voting US shareholder, who owns only 25% of the foreign corporation. The foreign corporation is not a CFC. You do not fall under the CFC-PFIC overlap rule. You must treat your shares in the foreign corporation as shares in a PFIC. You must file Form 5471 under category 3 as well as file Form 8621.

50-50 ownership with your nonresident alien spouse

Category 4 filers of Form 5471 are US persons who control a foreign corporation. Control means owning more than 50% of the voting power or shares of a foreign corporation. Form 5471 instructions, 2.

Suppose you are a US person, and your spouse is a nonresident alien. Each of you owns 50% of the shares of a family holding company, and the family holding company is a PFIC.

When you analyze ownership under category 4, you have to use attribution rules. Reg. §1.6038-2(c). You are treated as the owner of any shares that your spouse owns. IRC §318(a)(1)(A)(i). There is no exception for nonresident alien spouses under the attribution rules for category 4 filers.

Thus, for category 4, you are treated as owning 100% of the shares of the family company. You must file Form 5471 under category 4 to report the family holding company.

As it turns out, the CFC rules also have attribution rules, but there is one crucial difference: Under CFC attribution rules, a US person is not considered the owner of shares of a nonresident alien family member. IRC §958(b)(1).

Thus, for CFC purposes, there is only one US person who owns at least 10% of the voting power of the family company: You. You own only 50% of the shares. The family company is not a CFC. You do not fall under the CFC-PFIC overlap rule. You treat your shares in the family holding company as shares in a PFIC. You must file Form 5471 under category 4 as well as file Form 8621.

Buying out your 50-50 nonresident alien partner

Suppose you are a US person. You started an investment company with a nonresident alien business partner, and each of you owns 50% of the shares. The investment company is a PFIC. A few years later, you buy all shares from the business partner, so the investment company is now a CFC as well.

There is a “once a PFIC, always a PFIC rule”. It says that if you were, at any time during your holding period of shares in a foreign corporation, required to treat your shares as shares in a PFIC, then you must continue to treat your shares as shares in a PFIC. The only way to rid the shares of the PFIC stain is by making a purging election. Reg. §1.1297-3.

What happens after the buyout is this: You are a 10% voting US shareholder of a CFC, so you must file Form 5471 under category 5. But you also must treat your shares as shares in a PFIC, so you must file Form 8621. Both the CFC and PFIC rules apply to your shares. You may want to consider a retroactive purging election to rid the shares of the PFIC taint, starting on the day the foreign corporation became a CFC.

Summary

For a foreign corporation that meets the definition of a passive foreign investment company (PFIC), there is one situation where you have to file Form 5471 but not Form 8621. You must own 10% of the voting power of the foreign corporation, and the foreign corporation must be a controlled foreign corporation (CFC). In addition, you must not fall under a “once a PFIC, always a PFIC rule”.

By contrast, there are many situations where you must file both Form 5471 and Form 8621 to report the same foreign corporation. Therefore, you should take a look at both the Form 5471 filing requirements and Form 8621 filing requirements to determine whether you have to file either or both.

PFIC and CFCs