If You Are A U.S. Citizen Who Owns A Costa Rican Corporation – You’d better be filing IRS Form 5471.
U.S. citizens who move to, or acquire property in, Costa Rica often find it necessary or convenient to form a Costa Rican corporation to own their local real estate.
Many such persons may not know that IRS rules require reporting the formation of the Costa Rican corporation and annual filings thereafter on Form 5471, even if the corporation earns no income or is dormant.
Severe penalties can apply for failure to file or late filing, and there is no statute of limitations for this omission. And if the corporation has bank or financial accounts on which the U.S. individual is a signatory, the foreign bank account reporting rules (FBAR) and their own onerous penalties may require additional reporting.
When did this start?
Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) is not a new requirement; it and predecessor forms having been part of U.S. tax law for decades.
Filing the form does not in itself result in taxable income to the U.S. citizen shareholder; that depends on whether the corporation has any income and further on the application of the complex controlled foreign corporation and other U.S. tax rules, beyond the scope of this article.
The Form is due with the U.S. federal income tax return of the shareholder. A simpler filing format is allowed for foreign corporations that are classified as dormant under the rules.
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Who must file this form?
This article is addressed to the simple situation where a single U.S. citizen forms and owns the stock of the Costa Rican corporation owning Costa Rican real estate for personal use.
It does not address more complicated situations such as those involving multiple shareholders, non-U.S. shareholders, U.S. tax resident (non-citizen) shareholders; subsidiary corporations or partnerships, non-voting stock, the ownership of other investments or assets by the corporation, or real estate development, rental income or other income of the corporation.
It also does not address the filing rules that may apply to a U.S. person (other than the simple owner structure, above) who becomes an officer or director of a foreign corporation, or who acquires stock in the corporation.
Should I be concerned?
Penalties for failure to file Form 5471 include a specific $10,000 penalty for failure to timely file unless the person required to file can show reasonable cause.
If the IRS mails notice of failure to file and the delinquent form is not filed within 90 days, an additional penalty of $10,000 applies for each 30-day period in which the failure to file continues, up to a maximum of $50,000.
These amounts apply for each accounting period of the corporation for which the form is not filed, so if more than one year is involved, the penalty rules are applied separately for each year. Foreign tax credits also are disallowed for failure to file the form.
What if I sell my Costa Rica real estate?
Other tax filing rules may apply, depending on circumstances. For example, if the U.S. citizen transfer property to the corporation in certain type of transactions, may also need to file Form 926.
Interests in a foreign partnership may be required to be reported on Form 8865.
What should you do if this filing obligation applies to you?
You should file the delinquent form(s) right away, with assistance of a qualified U.S. tax professional.
There is a simple way to legitimately avoid this filing requirement if the Costa Rican company is a Limitada. But certain conditions have to be met first, so we strongly recommend to do a screening with both your US and Costa Rican Accountant and make sure that you are able to avoid the filing.
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Written by Jonathan H. (Jason) Warner who practices in Miami, Florida, and the North Carolina mountains, concentrating on international tax matters. He is a former chair of the Florida Bar Tax Section and was named the Section’s ‘Tax Attorney of the Year” in 2008. He was a principal participant in the Section’s FIRPTA withholding tax project that resulted in enactment of a new model federal tax withholding system. He is a past Chair of the Committee on International Tax of the ABA Section of International Law and Practice, and has authored several comments to Congress and Treasury on pending federal legislation or regulations. He is a frequent speaker and writer on international and other tax topics.
He received his J.D. degree in 1971 from Columbia University School of Law, where he was Managing Editor of the Columbia Journal of TransNational Law.
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Andrew Makarik
to@welovecostarica.comAndrew Makarik is the main editor of WeLoveCostaRica, a fan of this sunny country. He is also a loving husband and a has a lovely daughter. By being a devoted family man and the biggest Costa Rica fan, he wants to make more people feel at home there. WeLoveCostaRica unites people and helps them find new home or a new travel destination. This website is a friendly community where everyone can find not only information, but also new friends and travel pals. Andrew is also passionate about IT and programming, so he himself maintains a friendly atmosphere in this cozy environment of WeLoveCostaRica.com.
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My wife bought a piece of real estate in Costa Rica early in 2017 under a limitedtada corporation as the sole shareholder
And later jointly purchased another property with a friend again under the umbrella of a limited a corporation. We are wondering if
Filing a Form 5471 is required?
John Mills