U.S. Shareholders of Foreign Corporations and the Moving Target of Form 5471
January 8, 2020
The 2017 Tax Cuts and Jobs Act (TCJA) enacted significant changes to the U.S. international tax regime. U.S. shareholders are affected by the changes that impact the U.S. tax consequences of owning a foreign corporation. The TCJA revised the technical rules applicable to U.S. shareholders of controlled foreign corporations (CFCs). Along with issuing guidance on how to calculate and report taxable earnings of CFCs, the IRS has updated and revised the U.S. federal Form 5471.
The revised Form 5471, Schedule G now includes an extensive list of technical questions that require specialized competence in U.S. international tax reporting to be able to address accurately. The last question on the Schedule G incorporates by reference another extensive list of questions that are set forth in a schedule in the IRS Form 5471 filing instructions.
The Form 5471, Schedule J also includes much more detailed tracking and reporting of earnings and profits based on the various categories of non-previously taxed earnings and profits and PTEP. The Schedule J reports 100% of the foreign corporation’s current earnings and profits (CEP) and accumulated earnings and profits (AEP). The new Schedule P reports only the U.S. filer’s share of the PTEP. Schedules J and P are particularly important and useful for the tracking of a CFC’s distributions out of different categories of earnings and profits. There can be different U.S. tax consequences to the U.S. shareholder depending on whether a CFC distribution is made out of PTEP or non-previously taxed E&P. Additional technical requirements apply to CFC distributions depending on whether a U.S. individual shareholder has an IRC section 962 election in effect for the year of an inclusion of undistributed earnings.
The IRS has issued Notice 2019-01 which provides guidance for the ordering rules applicable to distributions from CFCs out of the various categories of PTEP. The IRS is working on the new regulations under IRC section 959 regarding the ordering rules for distributions of a CFC’s earnings and profits. To date, the IRS has not issued the new regulations.
Aprio LLC’s international tax services team has developed a high level of proficiency and capability with the preparation of the revised and updated U.S. federal Form 5471. We also bring specialized capability to U.S. taxpayers regarding the proper classification of PTEP in the respective categories and the impact of CFC distributions with and without the IRC section 962 election for individuals.
Contact Aprio’s International Tax team today to connect with an experienced advisor.