Your Foreign Company Owes You Nothing, but the IRS Wants a Form 5471

An American living in Mérida sets up a Mexican S. de R.L. de C.V. because her contador told her it was the clean way to invoice her consulting clients. She pays her Mexican taxes, leaves the profit in the company account to reinvest, and takes a modest salary. Three years later she learns two things on the same afternoon: the United States considers her company a "controlled foreign corporation," and because she never filed Form 5471, she is looking at roughly $30,000 in stacked late-filing penalties, before anyone has even asked whether she owes a dollar of actual income tax.

No expensive cross-border surprise shows up more often with US founders and investors abroad. The structure they built was usually correct under local law. It just never got looked at from the US side. The entity name changes with the country (an S. de R.L. or S.A. de C.V. in Mexico, an S.A. or S.R.L. in Costa Rica or Panama, an SRL in Italy, a Ltd in the UK), and the US answer does not change with it.

Can the US tax my foreign company's profits if it never paid me anything?

Yes. Under the GILTI regime enacted in the 2017 tax act, a US shareholder of a controlled foreign corporation can owe US tax on the company's earnings in the year they are earned, whether or not the company distributes anything. This is "phantom income": tax on money still sitting in the company's local bank account.

The logic Congress used was that a foreign corporation controlled by Americans could otherwise be a permanent tax deferral box. GILTI, Global Intangible Low-Taxed Income under §951A, closes that box by taxing most of the foreign company's net income to its US owners annually. (The 2025 tax law renamed the inclusion "net CFC tested income" for tax years beginning after December 31, 2025, and tightened the math, but the annual-inclusion mechanics are the same.) Despite the "intangible" name, the regime applies to ordinary operating profit, not just IP income. If your foreign company nets $120,000 and you leave every peso of it in the account, you can still have a US inclusion on your personal 1040.

What makes my foreign company a controlled foreign corporation?

A foreign corporation is a controlled foreign corporation (CFC) when US shareholders together own more than 50% of it, counting only those US persons who each own at least 10% (§957 and §951(b)).

In practice, for the people reading this, the test is usually met instantly:

• A US citizen who owns 100% of a Mexican S. de R.L. de C.V., a Costa Rican S.A., a Panamanian S.A., or a UK Ltd: that is a CFC.
• Two US friends who each own half of a foreign startup: CFC.
• A US person owning 30% alongside foreign partners owning 70%: often not a CFC, but the 10% shareholder may still have reporting duties.

Ownership counts direct, indirect, and constructive interests, so family members and tiered entities can pull you over the line in ways that aren't obvious. Citizenship, not residence, drives this. Living in Mérida for a decade does not take you out of the US system.

What is Form 5471 and why is the penalty so brutal?

Form 5471 is the annual information return a US person files to report an interest in a foreign corporation. The late-filing penalty is $10,000 per form, per year, per entity under §6038(b)(1), and it applies even if no tax is due and even if the company lost money.

That last part is what catches people. The penalty is for not filing, not for not paying. You can owe zero income tax and still be assessed the full amount. And it stacks: the IRS has historically assessed these penalties automatically when a late return comes in.

Here is roughly how it accumulates for a single wholly owned company:

Missed year	Penalty	Running total
Year 1	$10,000	$10,000
Year 2	$10,000	$20,000
Year 3	$10,000	$30,000

There is also a continuation penalty under §6038(b)(2): if you still haven't filed 90 days after the IRS mails you notice of the failure, an additional $10,000 accrues for each 30-day period (or fraction of one) the failure continues, up to an additional $50,000 per return. Multiple foreign entities mean the whole thing multiplies again.

A note worth flagging: in Farhy v. Commissioner, the Tax Court held that the IRS lacked authority to assess §6038(b) penalties automatically, and the D.C. Circuit reversed that in 2024, restoring the IRS position. The law here is genuinely in motion. Do not build a plan around a court fight. Build it around filing.

What does the GILTI math actually look like without planning?

Without any election, GILTI income of an individual US shareholder is taxed at ordinary rates, up to 37%, and the individual cannot use the corporate deductions or the foreign tax credit for the taxes the company paid abroad.

That is the trap. A US C corporation owning the same CFC gets the §250 deduction and a deemed-paid foreign tax credit under §960: a 50% deduction and an 80% credit for tax years beginning before 2026, moving to a 40% deduction and a 90% credit for tax years beginning after December 31, 2025 under the 2025 tax law. An individual filing raw gets neither. So our consultant in Mérida, who already paid Mexican corporate income tax at 30%, can face a second US tax on the same profits with no credit for what Mexico took: the classic double-tax outcome the credit system is supposed to prevent.

How do the §962 and check-the-box elections change the arithmetic?

Two elections can rescue the math, but only if made on a timely basis, which is precisely why unfiled years are so damaging.

The §962 election. This lets an individual be taxed on GILTI as if they were a C corporation, unlocking the §250 deduction and the §960 foreign tax credit. For someone in a country with a real corporate tax rate, Mexico's 30% or Costa Rica's 30% among them, the foreign taxes often wipe out the US GILTI tax almost entirely. The election is made on a timely filed return under Reg. §1.962-2. Made three years late, on returns you're only now scrambling to file, its availability gets complicated fast.

The check-the-box election (Form 8832). A single-owner foreign company can elect to be treated as a disregarded entity, so its income flows straight onto your 1040 with normal foreign tax credits, often with no CFC or GILTI problem at all. But the election under Reg. §301.7701-3 takes effect no more than 75 days before it's filed (absent late-election relief), so it is a forward-looking tool, not a time machine.

The pattern is the same for both: made in time, they can turn a five-figure tax bill into little or nothing. Made late, you're arguing for relief instead of claiming a right.

The Mérida example, start to finish

Put it together for our consultant with the S. de R.L. de C.V.:

1. Years 1-3 unfiled. Three missed Forms 5471 = $30,000 in §6038(b) penalties, assessable regardless of income tax owed.
2. GILTI on retained profit. Her company's undistributed earnings are a US inclusion each year, taxed at ordinary rates with no §962 election in place, potentially double-taxed against the Mexican corporate tax she already paid.
3. Elections missed. The §962 election that would have credited her Mexican tax wasn't made timely; the check-the-box option that might have avoided the CFC framework entirely was never considered.

None of this happened because she did anything wrong in Mexico. It happened because no one looked at the structure from the US side in year one. Swap Mérida for San José, Panama City, Lisbon, or London and the story runs the same way with different stationery.

What to do if this is you

If you already own a foreign company and haven't filed, there are paths back: the Streamlined Filing Compliance Procedures for non-willful taxpayers, Delinquent International Information Return Submission Procedures, and reasonable-cause abatement under §6038(c)(4) among them. Which one fits depends entirely on your facts, and the willfulness question is one to work through with a tax professional and, where it crosses into potential exposure, an attorney.

The honest message for relocation and entity-formation clients: forming the company abroad was probably the right call. The mistake is treating the US filings as optional, or invisible. Get the US side reviewed before year one closes, while §962 and check-the-box are still tools you can pick up rather than remedies you have to beg for.

Sources

• IRC §957: controlled foreign corporation definition
• IRC §951(b): United States shareholder (10% threshold)
• IRC §951A: Global Intangible Low-Taxed Income (GILTI; renamed net CFC tested income for tax years beginning after 2025)
• IRC §250: GILTI/FDII deduction (50% for tax years beginning before 2026; 40% thereafter under the 2025 tax law)
• IRC §960: deemed-paid foreign tax credit (80% for tax years beginning before 2026; 90% thereafter under the 2025 tax law)
• IRC §962: election to be taxed at corporate rates; Reg. §1.962-2
• IRC §6038(b)(1) and (b)(2): Form 5471 late-filing and continuation penalties; §6038(c)(4): reasonable cause
• Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
• Form 8832, Entity Classification Election; Reg. §301.7701-3 (check-the-box)
• Farhy v. Commissioner (T.C. 2023), rev'd (D.C. Cir. 2024)
• One Big Beautiful Bill Act (2025): changes to §951A, §250, and §960 effective for tax years beginning after December 31, 2025
• IRS Streamlined Filing Compliance Procedures; Delinquent International Information Return Submission Procedures