Form 5471 - Revised instructions include expanded constructive ownership exception 

Form 5471 [PDF 166 KB] is filed by U.S. persons who are officers, directors, or shareholders in certain foreign corporations. Those U.S. persons required to file From 5471 are listed as “Category 1” through “Category 5” filers.

The new instructions [PDF 346 KB]—with a revision date of December 2012—contain a change to the constructive ownership exception that previously was limited for Category 3 and 4 filers. Under the new instructions, a U.S. person described as a Category 5 filer (as also with Category 3 and 4 filers) is no longer required to file Form 5471 if all three conditions are satisfied:

• The U.S. person does not own a direct interest in the foreign corporation.
• The U.S. person is required to furnish the information requested solely because of constructive ownership (as determined under Reg. section 1.6038-2(c) or 1.6046-1(i)) from another U.S. person.
• The U.S. person through whom the indirect shareholder constructively owns an interest in the foreign corporation files Form 5471 to report all of the required information.

The new instructions also clarify that no statement is required to be attached to tax returns for persons claiming the constructive ownership exception.

KPMG observation

The expansion of the constructive ownership exception to Category 5 filers is expected to ease the compliance burden of affected taxpayers and eliminate their future potential penalty exposure. Note, however, that the IRS has not indicated whether this expansion of the constructive ownership exception to Category 5 filers applies to previously filed Forms 5471.

The new instructions also incorporate changes enacted by the American Taxpayer Relief Act of 2012—specifically the extension of the active financing income exception and the look-through rule of section 954(c)(6)—and include guidance concerning the “Reference ID” number of foreign corporations, as well as concerning Schedule G to provide expanded information on reportable transactions and Schedule I to report the name and ID number of Category 4 and 5 filers.