"U.S. shareholders" of a CFC are required to file Form 5471 with their personal tax return, even if the CFC has no subpart F income. Form 926 is used to report transfers of property (including cash) to a foreign corporation. Since a foreign corporation will have some kind of foreign bank or financial account, the U.S. shareholders who have control, signatory authority or a financial interest, over the account must file Form TD F 90-22.1 by June 30th of the year after the calendar year. If the foreign corporation’s shareholders have made an election to have the corporation treated as a disregarded (non-corporate) entity for U.S. tax purposes, then the shareholders must file a Form 8865 for a foreign partnership and a Form 8858 for a foreign disregarded entity.

In order to make an election to be treated as a disregarded entity, a Form 8832 must be filed. If the foreign corporation has made an investment in any passive foreign investment companies, or if the foreign corporation is a PFIC, then the U.S. shareholders may be required to file a Form 8621 to report their share of the income of the PFIC or the gain on any dispositions of PFIC shares. If the Foreign Corporation has any U.S.-source income, it will need to file a Form 1120-F. If it is a Foreign Sales Corporation, it will need to file a Form 1120-FSC. In the event of the purchase or sale of a foreign corporation, the buyer and seller will need to file a Form 8883, which is an Asset Allocation Statement. If the shareholders or the corporation rely on a treaty that overrides a provision of the IRC, a Form 8833 must be filed to reflect a Treaty Based Return Position. Depending on the nature of the business of the corporation, other forms may be required.

The following is a very brief description of the forms mentioned here.

Form 5471 for U.S. Shareholders of Foreign Corporations

This is an “Information Return of U.S. Persons With Respect to Certain Foreign Corporations.” It is required to be filed at the time that you file your corporate or personal tax return, including any extended filing date. A second copy must be sent to the Philadelphia office of the IRS.

If you are: (1) a shareholder, director or officer in a foreign corporation; (2) the grantor of a trust that has formed a foreign corporation (aka IBC); or (3) an individual whose U.S. corporation or partnership owns shares in a foreign corporation, then you must determine whether you are required to file IRS Form 5471.

There are five categories of persons required to file this form:

(1) A U.S. citizen or resident who is an officer, director or a 10% shareholder of a FPHC (i.e. an investment company).

(2) A U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person has acquired stock that meets the 10% ownership requirement.

(3) A U.S. person (defined below) who acquires stock in a foreign corporation, which when added to any stock owned meets the 10% ownership requirement.

(4) A U.S. person who had control of a foreign corporation for an uninterrupted period of at least 30 days during the accounting year of the corporation.

(5) A U.S. shareholder who owns stock in a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year and who owned that stock on the last day of the year.

For the purposes described above, a “U.S. Person” includes a citizen, permanent resident, domestic partnership, domestic corporation, a domestic trust or a domestic estate.

Depending on which of the five categories apply to a particular taxpayer, different schedules must be completed. An officer of director of a CFC who is not an owner of the CFC will be required to file under category 2 where certain U.S. persons have acquired additional stock in the corporation. A category 2 filer is only required to complete page one and schedule G. Where a U.S. corporation is the 100% owner of a foreign corporation that is not a FPHC, the corporation could be classified as a category 3, 4 and 5 filer. In this case, all of the schedules except Schedule A, Part II and Schedule O, Part 1 may be required.

In the instructions to the 2006 Form 5471, the IRS estimates that the average time required for record keeping to prepare this form is 82.5 hours, that the average time required for learning about the form is 16 hours and that the average time required to prepare the form is 24 hours. (That does not include the separate time estimates for schedules J, M, N and O.) Clearly, these time estimates are for fairly substantial business activity rather than for a foreign corporation with only a few transactions. However, we believe the time required to learn how to prepare this form is much greater than the IRS estimate, even for a tax professional who familiar with domestic tax law.

A nasty surprise that your preparer discovers when reading the instructions is that Schedules C, F and H must be prepared on the basis of U.S. based GAAP (generally accepted accounting principles). This precludes the use of the cash or hybrid method of accounting. The return itself is just four pages, but there are also four pages of worksheets included in the 15 pages of instructions.

You must find out if you or your company is required to file this form. If you have any ownership interest in a foreign corporation or if you are an officer or director of a foreign corporation, you must file. If you are the grantor of a foreign trust and if the trust owns shares in a foreign corporation, you may have to file this form. The following is a partial list of who has to file. If you own 50% or more of a domestic corporation or partnership that owns 10% or more of a foreign corporation, you might be required to file this form.

The penalties for a failure to file the return are severe - and it is not necessary that the corporation have any profits for the penalties to apply. A return must be filed even if there is no taxable income to report. Complete details of the applicable penalties are provided in the instructions to Form 5471, but in general, the penalty is $10,000 per year for failing to file the form. In addition, if the form is not filed, your personal income tax return is deemed to be incomplete and the statute of limitations does not begin to run until the information required by Form 5471 has been submitted.

This form is required to be filed by April 15th or the extended due date of your personal or corporate tax return.

Form 926 for Transfers to Foreign Corporations

Previously, Form 926 was required to report the transfer of certain property to foreign corporations, partnerships, estates or trusts. It was primarily used to report transfers of appreciated property that were potentially subject to the 35% excise tax under IRC Section 1491. However, that IRC section was repealed by the Taxpayer Relief Act of 1997 and the continued purpose of Form 926 was unclear, until it was revised in October, 1998.

This return now requires the disclosure of transfers of tangible or intangible property (even if it is not appreciated property) to a foreign corporation. Transfers to a foreign partnership are to be reported on Form 8865. Transfers to a foreign trust are to be reported on Form 3520.

Form 926 is a brief one and ½ page form with only two pages of instructions. However, it requires an attachment describing the property transferred that can sometimes involve more than a few pages of explanation.

The report is required to be included with the taxpayer’s income tax return. Failure to file this form may subject the transferor of the property to a penalty of 10% of the fair market value of the property, but not more than $100,000, unless the IRS can show that the failure to file was intentional. In addition, the statute of limitations for examining an income tax return where the form should have been filed is extended to three years after Form 926 is filed.

On February 4, 1999, the IRS and the Treasury Department released final Treas. Regs. that modify, clarify and, in some cases, simplify information reporting requirements contained in proposed Treas. Regs. issued on September 8, 1998, relating to transfers by U.S. persons to foreign corporations. The final Treas. Regs., which implement amendments made by the Taxpayer Relief Act of 1997 and require certain cash transfers to foreign corporations to be reported, also provide guidance needed to comply with the reporting requirements related to such cash transfers and transfers of property to foreign partnerships.

Form 8832—Check the Box Entity Classification

This form can be used to avoid having to file a Form 5471 if it is filed on a timely basis after the formation of a CFC. For a single owner CFC in a country that is not on the "per se" list described in Treas. Reg. Section 301.7701-2(b)(8), the corporation can elect to be a "disregarded entity.” Generally, the “per se” list does not include any International Business Companies or any foreign limited liability companies. An IBC and a foreign LLC will be treated as a foreign corporation unless it makes an election to be a disregarded entity.

A summary of the income, expenses, assets and debts of the foreign entity will have to be reported on a Form 8858 (see below). The net income of the entity would then be included in the Form 1120 of a domestic corporation that is the sole owner of the CFC or on the Form 1040 of an individual who is the sole owner of a CFC. If there are multiple owners of the foreign entity, it will have to file a Form 8865 (see below) for a foreign partnership.

With a disregarded entity election, the Form 5471 is not required. However, that is not clearly the case with the Form 926 and we advise clients to file this form even if they have elected to have their CFC be taxed as disregarded entities.

The disregarded entity election does not help to avoid the complications and cost of the Form 5471 for a foreign corporation or LLC with multiple owners because the owners will be required to file a Form 8865, which is more complicated than the Form 5471. But it does permit flow through tax treatment and avoids a number of tax disadvantages of the CFC.

Form 8858—Information Return of U.S. Persons with Respect to Foreign Disregarded Entities

This form was first required for the 2004 tax year. It consists of three pages and is designed to provide the IRS with a way to connect foreign disregarded entities with their U.S. owners. It requires identifying information, a summary of the income and deductions, a very brief balance sheet, a number of questions and a brief summary of the earnings and profits of the foreign entity. The third page of the form is a matrix of transactions between the entity and various related parties, including the owners of the entity. This page substantially duplicates the information required by Form 926 but there is no reference to the Form 926 on this form or to this form from the Form 926.

There is a penalty of $10,000 for a failure to file this form “within the time prescribed.” The time prescribed is the due date of the tax return of the owner(s) of the disregarded entity including any extensions of time to file.

Form 8865—Return of U.S. Persons with Respect to Certain Foreign Partnerships

Where there are multiple owners of a foreign limited liability entity or foreign partnership, certain U.S. owners of the entity must file a Form 8865. This form is a combination of the Form 1065 for domestic partnerships and the Form 5471 for CFCs. Because of the complexity of partnership tax law, the foreign partnership return is more complex than the foreign corporation return but the instructions to the Form 8865 are just 10 pages as compared to 15 pages for the foreign corporation return.

The filing requirements are somewhat similar to those for the U.S. owners of a CFC and also serve to identify which of the various schedules must be submitted by different kinds of filers.

A category 1 filer is a U.S. person who owns 50% or more of the partnership. Because of the rules for constructive ownership and attribution of ownership, there can be more than one 50% owner of a foreign partnership.

A category 2 filer is a U.S. person who owns a10% or greater interest in the partnership. However, if the partnership had a category 1 filer, no other partner would be required to file as a category 2 filer.

A category 3 filer is a U.S. person who has contributed property to the partnership during the tax year and who owns a 10% or greater interest after making that contribution or whose contribution had a value (on the date of the transfer) in excess of $100,000.

A category 4 filer is a U.S. partner who had an acquisition, disposition or change in his proportionate partnership interest during the tax year.

A schedule K-1 is required to be prepared for each U.S. partner to report the partner’s share of the income, deductions and credits of the partnership.

The Form 8865 must be filed with the income tax return of the U.S. partners who are required to file the form. In some cases, this could include all of the partners or in other cases, it might only include a 50% or greater partner.

There is a $10,000 penalty for a failure to file a timely return. A reduction in foreign tax credits will be imposed for an incomplete return filed on time.

Form 8621—Passive Foreign Investment Company

Form 8621 is used to report the income of or gains from a PFIC, which is a foreign corporation where 75% or more of the gross income is from passive investments or where 50% or more of the assets are held for the production of investment income or gains.

If a foreign corporation owned by U.S. persons is a CFC and is also a PFIC, the CFC reporting rules take precedence for the shareholders who own at least 10% of the stock of the corporation. Thus, income received from the CFC/PFIC or gains from the disposition of shares of the PFIC will be treated as subpart F income and will be classified as ordinary income in the hands of the shareholders of the CFC/PFIC.

However, those shareholders of the CFC/PFIC who own an interest of less than 10% will be subject to the PFIC reporting rules. This means that they must either elect to pay tax on the current income of the PFIC or they will be subject to a highly punitive method of taxation when accumulated income is received or when shares of the PFIC are transferred by a sale, exchange, gift or bequest. If they are unable to obtain the information necessary to make an election to report the income currently, then they will be subject to the punitive throwback tax calculation on distributions of accumulated income and gains from the disposition of shares.

If a CFC is the shareholder of a PFIC, the shareholders of the CFC are indirect shareholders of the PFIC. For this purpose, it appears that the reference to a “shareholder” does not mean a 10% or greater shareholder, but the instructions to the form 8621 are not clear on this issue.

There are no direct penalties for a failure to file the Form 8621. The form can be used to elect to pay taxes currently on the shareholder’s portion of the income of the PFIC in order to avoid the throwback tax. By not filing the Form 8621 (or not being able to file it), the “penalty” is a tax that is computed at the highest marginal tax rate in the tax tables plus compound interest from the date the income is deemed to have been earned.

Form 8833—Treaty Based Return Position Disclosure

The provisions of a treaty usually override the provisions of the IRC. When a tax payer relies on a provision of a treaty that is different from the position of the IRC, the position must be disclosed on Form 8833. However, Treas. Reg. Section 301.6114-1(c) provides a list of treaty based return positions that do not require disclosure on Form 8833. This is a one page form, but it may require extensive attachments.

Form 8883—Asset Allocation Statement

This two page form is not unique to the area of international taxation. It is required where there is a purchase or sale of the assets of a business in which there is a need to allocate the purchase price among the various assets. The allocation is to be reported on this form.

Form 1120-F—Income Tax Return of a Foreign Corporation

This is the tax form that is filed by a foreign corporation with income from U.S.-sources. It includes a CFC with U.S.-source income. If the foreign corporation is engaged in a trade or business in the U.S., it will not be subject to withholding on its U.S.-source income but it will pay a corporate income tax on such income. If the foreign corporation is not engaged in a trade or business in the U.S., then its U.S.-source income may be subject to withholding by the U.S. payor. In that case, the amounts withheld may be claimed as a credit (payment) on Form 1120-F.

The U.S.-source income of a CFC is not also subject to tax by U.S. shareholders as subpart F income. The U.S.-source income must be accounted for separately so that when it is distributed, it is treated in the same manner as distributions from a domestic corporation.

A penalty for a late filed return is 5% each month of the unpaid tax up to a maximum of 25% of the unpaid tax.

Form 1120-FSC

The Foreign Sales Corporation (FSC) is a foreign corporation that is primarily engaged in exporting U.S. products and it used to be eligible for various tax incentives. The FSC tax incentives were repealed by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000. The 2000 act eliminated the FSC and EIE incentives as of September 30, 2000, except for binding contracts that were in place on that date. Due to continued objections of the European Union to the drawn out export subsidy, the U.S. enacted the American Jobs Creation Act of 2004 that repeals the extra-territorial income deduction after 2007 and phases out the benefits during 2005, 2006 and 2007.

Form TD F 90-22.1

Any U.S. person (taxpayer) who has any authority over or interest in any foreign financial account is required to file TD F 90-22.1 on or before June 30th of the year following the taxable year, if the aggregate value of their foreign accounts equals of exceeds $10,000. It's a very brief form, requiring only one page to report a single foreign account and only two pages to report as many as four foreign accounts.

The penalties for failing to file the form are not merely severe. They are draconian if the government can prove that the failure to file the form was willful. The American Jobs Creation Act of 2004 introduced a new penalty of up to $10,000 for a non-willful failure to file the form. The law also provides that the IRS has the discretion to waive the entire penalty if the taxpayer can demonstrate a reasonable cause for not filing the form.

The law does not state whether the penalty applies in the case of a delinquent filing of the form.

Links to Tax Forms

A U.S. person who establishes and funds, directly or indirectly, a foreign trust that has a U.S. beneficiary must file the following Internal Revenue Service forms:

• Form SS-4 — Application for a Tax Identification Number—in order to obtain a tax identification number for the foreign trust;

• Form 56 — Notice Concerning Fiduciary Relationship—advising the Internal Revenue Service of a trust relationship;

• Form 3520 — Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts—with respect to the creation and/or funding of the foreign trust (a yearly tax return), required under I.R.C. section 6048;

• Form 3520-A — Annual Information Return of Foreign Trust With a U.S. Owner—with respect operations of the foreign trust (a yearly tax return), required under I.R.C. section 6048(b);

• Form 709 — Gift Tax Return—and a completed gift is made for gift tax purposes unless the trust instrument re-serves the right to the settlor to change the disposition of the foreign trust, after death, by his will or codicil;

• Form 1041 — U.S. Income Tax Return for Estates and Trusts; and

• TD F 90-22.1 — Report of Foreign Bank and Financial Accounts—must be filed by the settlor for having an interest in a foreign financial account.

• Schedule B, Part III of Form 1040 — Federal Income Tax Return—for having an interest in a foreign financial account and for creating a foreign trust.

Form 8865 —Return of U.S. Persons With Respect to Certain Foreign Partnerships

Form 8621 —Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund