Section 957(a) of the Internal Revenue Code defines a Controlled Foreign Corporation (CFC) as any foreign corporation of which United States shareholders own more than 50% of the value or voting power of the foreign corporation on any day during the taxable year. A “United States person” is a citizen or resident of the United States.
The shareholders of a CFC must report and pay tax on the undistributed “Subpart F” income of the CFC when earned, whether or not the funds have been distributed. However, once income of the CFC is taxed to the shareholders under Subpart F, it will not be taxed again when distributed. Even when a CFC has no income that is taxable to its U.S. shareholders, they may still be required to file an information reports in the U.S.
Required Reporting and Penalties
A U.S. person who owns more than 50% of the value or voting power of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of the foreign corporation must file Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations). The tax regulations provide that the form must be filed even if the ownership in the CFC does not affect the amount of any tax due under the Internal Revenue Code.
A penalty of $10,000 applies to any person who does not timely file a form 5741. If the failure to file continues for more than 90 days after the day on which the IRS mails notice of the failure, the CFC shareholder must pay an additional penalty of $10,000 for each 30-day period, or fraction thereof, beyond the 90-day period, up to a maximum of $50,000. The failure to file penalty can, however, be abated for reasonable cause shown.
A willful failure to report or taking action designed to evade or defeat the tax, can subject the taxpayer to several significant possible criminal penalties, including significant fines or imprisonment for each failure and/or evasion.
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