Schedule O on Form 5471: Foreign Corporate Reorganizations and Acquisitions
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 O is used to report the organization or reorganization of a foreign corporation and the acquisition or disposition of its stock.
Who is required to file Form 5471 Schedule O?
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 2 filers are required to complete Schedule O, Part I. Category 3 filers are required to complete Schedule O, Part II. The other filing categories are not required to file Schedule O as part of their Form 5471.
Category 2 Filer
A Category 2 filer is a US taxpayer who is an officer or director of a foreign corporation in which there has been a change of at least 10% in the US ownership of the foreign corporation. Whether the ownership changes in one or more transactions is irrelevant. Constructive and indirect ownership is relevant.
If a US taxpayer is an officer or director of a foreign corporation of which 9% of the total value is owned by a US person and that US person acquires an additional 2%, he is required to file Schedule O for the year in which the additional 2% acquisition is made. The same would apply for the situation where the ownership percentage increases from 19% to 21%. Similarly, if another US person would acquire 10% of the value of the foreign corporation, the US officer or director would be required to file Form 5471 Schedule O. The disposition of shares does not create a filing obligation.
Category 3 Filer
The 3rd filing category is similar to the 2nd filing category, as discussed above. Category 2 applies to a US taxpayer who is an officer or director of a foreign corporation. Category 3 applies to the US taxpayer who is a shareholder himself. The 10% stock ownership requirement for Category 3 is similar. When a US taxpayer’s ownership of the value of a foreign corporation is 10% or more, or an increment of 10%, he is required to file Schedule O.
However, whereas the disposition of shares does not create a Category 2 filing obligation, it does for Category 3. In other words, if a US shareholder disposes of sufficient stock to reduce his interest to 10% or less, he is required to complete Schedule O. Constructive and indirect ownership is relevant for Category 3.
Schedule O, Part I
Part I of Schedule O is completed by a US taxpayer who is an officer or director of a foreign corporation. Part I is used to provide basic information to the IRS of the shareholder who owns the foreign corporation. This part of the schedule requires the name, address and taxpayer identification number, as well as the date of the transaction.
Schedule O, Part II
Part II must be completed by Category 3 filers. This part has several Sections, A through F. Sections A and B require only basic information, such as names and addresses. To complete Section C, it is important to understand IRC 958. Internal Revenue Code section 958(a) provides rules for direct and indirect ownership. IRC section 958(b) provides rules for constructive ownership.
IRC 958(a): Direct and Indirect Ownership
For Form 5471 Schedule O 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 O 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.