Press Room: Tax Release

March 08, 2013

Filing Requirements Related to Indirect Investments in Foreign Entities


This Fund Watch is being issued to inform investment fund managers of a time sensitive and potentially costly issue of which many may not be aware.

The issue in a nutshell:

Little has been discussed in the financial press concerning private-equity funds and fund investors who may have IRS reporting requirements relating to indirect interests in foreign entities through U.S. domestic portfolio companies. Many funds are not aware of their exposure for failure to meet those filing requirements. The penalty for non-compliance is $10,000 per instance, per year, potentially reaching hundreds of thousands of investment dollars for unintentional and/or unknown gaps in compliance.

Here is how this issue may affect your fund and, potentially, its investors:

IRS requires all U.S. persons (partnerships included) that own 10% or more of a foreign company to file a Form 5471 showing their ownership and related information on attributed earnings and distributions. This form is required annually for each such investment and has a penalty of $10,000 per year for each missed filing. Many fund managers believe they have no filing requirements as they have no direct ownership in a foreign entity. In addition, individual managers can be personally liable for filing requirements and a $10,000 penalty may be imposed on them to the extent they hold board seats in the foreign subsidiary.

Herein lies the problem:

If an investment fund owns more than 10% of a U.S. domestic company that itself has 100% interest in a foreign subsidiary—or two, or three, or ten—the fund is deemed to own 10% of each underlying foreign entity, triggering a reporting requirement. Normal prudence in reviewing annual portfolio statements and fund activity does not necessarily reveal that the portfolio company has a foreign subsidiary. Original deal books may be out of date with regard to newly formed foreign subsidiaries. Fund managers may have unknowingly signed on to the board of the foreign subsidiary in a flurry of closing documents. Unless someone is specifically looking or annually asking the right questions, a portfolio company with no interest in a foreign company last year may indeed have one this year.

The Solution:

WTAS is prepared to assist private equity funds identify their U.S. income tax reporting requirements for investments in foreign entities (and the consequential requirements of the fund’s investors). By asking the right questions and surveying the portfolio with our methodology, WTAS is able to take the extra steps to ensure identification of such reportable interests.

At the moment there is still an amnesty program that permits the filing of omitted reports for prior years while avoiding these significant penalties. This amnesty may end at any time; therefore, prompt action is important. If you believe you could possibly fall into this scenario, we are available to help you identify and file previously omitted Forms 5471.

If you have any questions or if we can be of any further assistance, please contact Tom Broderick (San Francisco) at 415-764-2722 or, Len Schneidman (Boston) at 617-292-8422 or, or Jim Goode (Boston) at 617-292-8411 or