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Form 5471 and UK Companies
Posted by rachelfinch on 09/16/2009 - 10:58
We have a client who was born in the US but lived in the UK since infancy. He has retained his US Citizenship. He is the controlling shareholder in several UK companies, none of the companies trade in or with the US and no profits or sales arise in the US. He has not filed US Tax Returns, and we now need to rectify this situation.
I am aware that we need to complete form 5471 for each company, but I am confused about what income from the UK companies is actually taxable in the US. The companies have very small amounts of bank interest (subpart f), all other income is trading income.
Any advice or references to relevant websites would be gratefully received.
- 3708 reads
Form 5471 and UK Companies
In response to your query as to what income is subject to US tax, I can offer the following high level advice:
1. Income of a UK company that is effectively connected with a US trade or business would be subject to US taxation - Form 1120-F is how to report such income.
2. Foreign personal holding company income in excess of 5% of gross income or $1,000,000 (whichever is less - that is if gross income is less than $1,000,000, then take the 5% figure as a measure, but if 5% of gross income is greater than $1,000,000, you look to $1,000,000 as the measure). This includes interest, dividends, rents, royalties, annuities and other passive types of income that do not meet other exceptions to the general rules.
3. Foreign base company income: sales, service. This happens when one CFC does business with a related party outside its country of incorporation. The rules can be complex but an example is if the CFC buys from a related and sells to anyone outside its country of incorporation, you have potential base company sales income; or it the CFC buys from anyone and sells to related outside its country of incorporation, same result. For services, if UK company performs services for or on behalf of a related party outside of the UK, then it has potential base company services income. Again, the rules can get quite complex in making this analysis.
4. If UK company invests in US property (eg loans money to a related US person) you could have income subject to US tax.
The instructions to Form 5471 provide a fairly simple worksheet for the basic calculations.
The bigger issue at hand will be filing for penalty waivers on the past failure to file returns. I have had some experience with this recently.
Not sure what your arrangement with your client is, but should you be interested in receiving some assistance preparing or reviewing the US returns, I may be able to be of service.
James W. Guthrie, Jr., CPA, International Tax Advisor
jw_guthrie_jr69@q.com