Schedule M on Form 5471: Reporting Transactions between a Controlled Foreign Corporation and Shareholders or Other Related Persons
Form 5471 is used by US taxpayers who have ownership or control over certain foreign corporations. The purpose of Form 5471 is to provide the IRS with detailed information about these foreign corporations and their US shareholders. Schedule M is used to report transactions between the reporting foreign entity and the US shareholder and certain related entities.
Who is required to file Form 5471 Schedule M?
Form 5471 includes various schedules. The IRS requires certain schedules to be filed as part of Form 5471 depending on the taxpayer’s filing category. There are 5 filing categories for Form 5471. Category 4 filers are required to complete Schedule M. The other filing categories are not required to file Schedule M as part of their Form 5471.
Category 4 Filer
Category 4 applies to the US Taxpayer who owns directly, indirectly, or constructively more than 50% of the stock of the entity (by vote or value).
Schedule M, Columns (a) through (f)
Form 5471 Schedule M reports transactions with the US taxpayer and an extensive group of entities reflected in the different columns therein:
- Any other domestic corporation or partnership the US person might control.
- Any other foreign corporation or partnership that the US person might control.
- Any other US shareholder with 10% ownership or more of the foreign corporation.
- Any other US shareholder of any corporation that might control the reporting foreign corporation.
Schedule M, Lines 1 through 30
Schedule M has been modified in recent years and the type of transactions subject to reporting has been expanded. Form 5471 Schedule M summarizes transactions reported across different schedules required as part of the Form 5471 and one should be aware of keeping consistency across them.
Schedule M, Lines 1 through 30 reports specific transactions between the US Taxpayer and other entities, including but not limited to: sale of inventory and other tangible property, rents, royalties and license fees, interest on loans, compensation for services, dividend distributions, amounts loaned and borrowed, as well as accounts receivable and payable.
IRC 958(a): Direct and Indirect Ownership
For Form 5471 Schedule M purposes, ownership includes indirect ownership. Shares owned in the shareholder’s name are owned directly. Indirect ownership refers to the situation where shares in a foreign corporation are owned by another foreign corporation of which the US taxpayer is a shareholder. For example, if the US taxpayer owns 20% of the shares in a Dutch BV, which owns 10% of the shares in a German GmbH, the US taxpayer (indirectly) owns 2% of the German GmbH. In other words, the stock in the German GmbH is considered as being owned proportionately by the US shareholder. These rules only apply to stock owned by foreign entities. Therefore, attribution under IRC 958(a)(2) stops with the first US person in the chain of ownership.
Regulations section 1.958-1 provides an example with additional layers in the chain of ownership. A US corporation owns 75% of the stock of a foreign corporation. The foreign corporation owns 80% of another foreign corporation, which owns 90% of a third foreign corporation. The US corporation owns 72% of the second foreign corporation. It owns 54% of the third foreign corporation.
Constructive ownership refers to the situation where stock owned by a person related to the US taxpayer is treated as owned by the US taxpayer. In other words, stock owned by the taxpayer’s spouse, children, grandchildren and parents is considered to be owned by the taxpayer. Be aware, the constructive ownership rules may also apply to stock owned by the taxpayer’s brother, sister and certain nonresident alien individuals, such as the taxpayer’s non-US spouse. In this context, an option to acquire stock is considered as ownership of that stock.
Failure to file Form 5471 Schedule M or providing inaccurate or incomplete information can lead to substantial penalties. Contact us to understand the Form 5471 Schedule O filing obligations. We’ll ensure compliance to avoid penalties. Sanders US Tax Services specializes in US corporate reporting. We have multilingual teams in the US as well as various European countries. We’re therefore able to work alongside your German, Dutch or Swiss accountant and enhance collaboration and facilitate a smoother exchange of information.