When Does 50% Ownership Trigger Form 5472 Related Party Reporting?

Understanding the ownership thresholds for IRS Form 5472 reporting is critical for foreign-owned U.S. businesses. While most people know about the 25% foreign ownership rule that triggers the filing requirement, fewer understand when 50% ownership becomes the determining factor for related party status.

The Two Ownership Thresholds on Form 5472

Form 5472 has two distinct ownership thresholds that serve different purposes:

1. 25% ownership threshold - Determines whether you must file Form 5472
2. 50% ownership threshold - Determines who qualifies as a related party

Let's explore when the 50% threshold matters.

What is Form 5472?

Form 5472 is required when reportable transactions occur between a reporting corporation and a foreign or domestic related party. A reporting corporation is either a 25% foreign-owned U.S. corporation or a foreign corporation engaged in U.S. trade or business.

According to the IRS Form 5472 instructions, a corporation qualifies as 25% foreign-owned if at least one foreign person owns, directly or indirectly, at least 25% of either the total voting power or the total value of all classes of stock at any time during the tax year.

Understanding the 50% Ownership Test for Related Parties

The 50% ownership threshold becomes relevant when determining which entities qualify as "related parties" under IRC Section 267(b). This is separate from the 25% threshold that triggers the filing requirement itself.

When 50% Ownership Creates a Related Party

The official IRS instructions specify that 50% direct or indirect ownership is determined by applying the constructive ownership rules of section 318 with the same modifications used for the 25% foreign shareholder definition.

IRC Section 267(b): The 50% Related Party Rules

Under IRC Section 267(b), which governs related party definitions for Form 5472, several relationships trigger related party status based on 50% ownership:

Individual and Corporation: An individual and a corporation are related parties when more than 50% of the value of the outstanding stock is owned, directly or indirectly, by or for such individual.

Trust and Corporation: A fiduciary of a trust and a corporation qualify as related parties when more than 50% in value of the outstanding stock is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust.

Two Partnerships: Two partnerships are related when the same persons own, directly or indirectly, more than 50% of the capital interests or profits interests.

Complete Definition of Related Party for Form 5472

According to the IRS Form 5472 instructions, a related party includes:

1. Any direct or indirect 25% foreign shareholder
2. Any person who is related within the meaning of section 267(b) or 707(b)(1) to the reporting corporation
3. Any person who is related within the meaning of section 267(b) or 707(b)(1) to a 25% foreign shareholder of the reporting corporation
4. Any other person who is related to the reporting corporation within the meaning of section 482 and the related regulations

The full text of IRC Section 267 is available at Cornell Law School's Legal Information Institute.

Why the 50% Threshold Matters

Understanding the 50% ownership test is crucial because it expands the universe of related parties beyond just the foreign shareholders. This means:

• Family members become related parties when they own more than 50% of another entity
• Sister companies are related when common ownership exceeds 50%
• Partnerships and corporations are related when overlapping ownership exceeds 50%

All transactions between the LLC and these related parties must be reported on Form 5472 for tax purposes, regardless of whether they are nonresidents or not.

Please see our blog post regarding related parties rules on family members here.

Constructive Ownership Rules Apply

The determination of ownership isn't limited to direct holdings. The constructive ownership rules of section 318 apply with an important modification to determine the 25% foreign ownership threshold for filing requirements.

Critical Modification: The 10% Substitution Rule

According to the IRS Form 5472 instructions, the constructive ownership rules of section 318 apply with a key modification: substitute "10%" for "50%" in section 318(a)(2)(C).

Section 318(a)(2)(C) deals with attribution from corporations. The standard rule states: "If 50 percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation."

For Form 5472 purposes, this threshold drops to just 10% instead of 50%.

What this means in practice:

Under normal section 318 rules, you must own 50% or more of Corporation A before Corporation A's stock holdings in other corporations are attributed to you. However, for Form 5472 purposes, if you own just 10% or more of Corporation A, that corporation's stock holdings will be attributed to you for purposes of determining the 25% foreign ownership threshold.

This lower threshold makes it significantly easier to meet the 25% foreign ownership test through

Corporate Attribution with the 10% Rule

You are a foreign individual who owns 15% of Foreign Corporation A. Foreign Corporation A owns 30% of U.S. Corporation B. Under normal section 318(a)(2)(C) rules, you would need to own 50% of Corporation A before Corporation A's stock holdings are attributed to you. However, because Form 5472 substitutes "10%" for "50%" in section 318(a)(2)(C), the 30% ownership that Corporation A has in Corporation B is attributed to you proportionately (15% × 30% = 4.5% indirect ownership).

While this specific example doesn't meet the 25% threshold alone, it demonstrates how the 10% rule makes attribution flow through corporations much more easily, potentially catching many more foreign owners in the Form 5472 filing requirement.

Consequences of Failing to Report Related Party Transactions

A penalty of $25,000 will be assessed on any reporting corporation that fails to file Form 5472 when due and in the manner prescribed. The penalty also applies for failure to maintain proper records.

If the failure continues for more than 90 days after IRS notification, an additional penalty of $25,000 will apply for each related party for each 30-day period during which the failure continues after the 90-day period ends.

Best Practices for Compliance

1. Map all ownership structures - Create organizational charts showing all direct and indirect ownership
2. Identify all 50%+ relationships - Look beyond just your foreign shareholders to sister companies, partnerships, and family-controlled entities
3. Track all related party transactions - Maintain detailed records of sales, services, loans, rents, and other transactions
4. File a separate Form 5472 for each related party - File a separate Form 5472 for each foreign or U.S. person who is a related party with which the reporting corporation had a reportable transaction
5. Consider attribution rules - Don't overlook constructive ownership through family members, trusts, and partnerships

Key Takeaways

The 50% ownership threshold for Form 5472 is critical for determining related party status under IRC Section 267(b):

• 50% ownership creates related party status between individuals and corporations, between two corporations with common ownership, between corporations and partnerships, and among other entity combinations
• Constructive ownership rules apply with a critical modification - the standard 50% threshold in section 318(a)(2)(C) is reduced to just 10% for corporate attribution (not partnerships), making indirect ownership through corporate chains much easier to establish
• The 10% corporate attribution rule expands the net significantly - if you own 10% or more of a corporation, that corporation's stock holdings are attributed to you for Form 5472 purposes
• Partnership attribution is proportionate - under section 318(a)(2)(A), stock owned by partnerships is attributed proportionately to partners with no minimum ownership threshold
• Family attribution and entity attribution can cause you to meet ownership thresholds even without direct ownership
• All related party transactions must be reported - including those with domestic related parties
• Penalties are severe - $25,000 per form, with additional penalties for continued non-compliance

For foreign-owned U.S. businesses, understanding both the 25% filing threshold and the 50% related party threshold is essential for maintaining compliance with Form 5472 requirements.

Additional Resources

• IRS Form 5472 Official Page
• Instructions for Form 5472 (December 2024)
• IRC Section 267 - Related Party Definitions
• IRC Section 482 - Allocation of Income Among Related Parties

This article is for informational purposes only and does not constitute tax or legal advice. Consult with a qualified tax professional regarding your specific Form 5472 filing obligations.