US citizen? Own shares in companies outside the United States? You must report it to the IRS !
US tax laws dictate that any American entity (individual, partnership, company, fund, etc.)
that is either the management, shareholder, and/or forms a portion of ownership in a foreign company,
must submit an annual report to the IRS.
These reports are necessary to fit the criteria and accountability required per sections §6038 and §6046 of the IRC.
Who is obligated to report?
In general, there are several categories and forms of ownership that dictate who is required to report for a foreign company.
Among these are US citizens or residents in possession of 10% or more of the company shares, before or during the tax year.
Per this definition, at least 10% of the company must be owned by the entity, or it should have a voting right of 10%.
Accountability is also required in instances of increased control of a foreign company, ranging more than 10%, throughout the year.
For instance, if the American entity held 5% of the company and acquired an additional 6% throughout the year, it must report under category 3, etc.
What is a CFC?
A Controlled Foreign Corporation defines shareholding by an American entity or entities exceeding 50%, or a voting right of 50%, throughout the year.
This definition is made to make holdings of a foreign company less attractive for US entities who wish to decrease or avoid income tax payment.
Legislation on this matter varies from state to state.
The US requires shareholders to report income attained through the company, even if undistributed, in the annual report 1040;
The definition of company ownership in Israel, however, is different.
But, The US-Israel tax treaty therefore determines that in case of a dispute between the involved countries,
reporters will not be persecuted until the two parties settle their issues.
How the report is done?
The Report of a foreign company is done in the annual individual tax report, via form 5471,
Attached as a separate form to the taxpayer return, at the designated reporting date.
For instance, an individual chosen to report on June 15th Of the following year will supply this form with the annual report.
Naturally, extensions may be applied for via form 4868, saving you penalties ranging from $10,000 to $50,000 on late filing.