For a US co-founder, UK company shares held alongside a British partner raise one question first: do US shareholders, counting family and option holdings, own more than half of the votes or value? If they do, the company is a controlled foreign corporation and the US co-founder files Form 5471 every year. If they do not, the form is usually needed only in years when ownership changes, and the British co-founder files nothing with the IRS for holding the shares.
This post is for founding teams where one founder is a US citizen or green card holder and the other is not a US person. It extends the Form 5471 section of our guide to US-UK tax for founders, fund managers and executives and assumes the basics in our post on Form 5471 for a one-person UK company. It covers the ownership tests, the filer categories, attribution, what the British co-founder is asked for, leaver and joiner events, and the clauses worth adding to a shareholders' agreement.
US co-founder, UK company: is it a controlled foreign corporation
It is a controlled foreign corporation if US shareholders together own more than half of the total voting power or the total value of its shares on any day of the company's year. A US shareholder is a US person owning ten per cent or more by vote or value, directly, indirectly or constructively.
The test is not about who runs the company. A British chief executive does not change the arithmetic, because only shares held by US persons who reach the ten per cent line are counted. An equal split is the case founders most often misread. A US co-founder with exactly half the votes and half the value does not own more than half, so on those facts alone the company is not a controlled foreign corporation.
Value is tested separately from votes. A preference class, a different dividend right or a capital priority can give the US co-founder more than half the value with only half the votes. Our post on alphabet shares with a US shareholder explains how share classes are weighed. The Instructions for Form 5471 (opens the official IRS page in a new tab) set out the definitions, and the list below is our own summary of the common splits.
- US co-founder above half by vote or value: a controlled foreign corporation
- Exactly half each, no other US owners: not a controlled foreign corporation on those facts
- US co-founder under half, but US relatives or investors take the US total above half
- US holder under ten per cent: not a US shareholder, so left out of the total
- British co-founder becomes a US person: their shares start counting from that point
Which Form 5471 categories does the US co-founder file
Where the company is a controlled foreign corporation, a US co-founder with ten per cent or more files in category 5, which overlaps with category 1, and in category 4 as well if she holds more than half. Where it is not, the form is usually limited to categories 2 and 3 in the years shares are issued, bought or sold.
Category 3 covers a US person who acquires stock that takes them to ten per cent or more, who disposes of enough to fall below it, or who becomes a US person while holding ten per cent. Category 2 covers a US citizen or resident who is an officer or director when a US person acquires ten per cent or more. A US co-founder who subscribes for her shares at incorporation and sits on the board is therefore usually in both for the first year, whatever the split.
After that the split decides the pattern. Control for category 4 is tested at any time during the filer's tax year, and controlled foreign corporation status on any day of the company's year, so a short spell above the line is enough. A US co-founder of a company that is not a controlled foreign corporation should still consider Form 8938 for the shares and, where the company holds mostly cash or investments, the passive foreign investment company rules in the Instructions for Form 8621 (opens the official IRS page in a new tab). Our business tax returns service runs each category from the share register.
How family holdings and options change the count
US tax counts some shares a founder does not hold. Shares owned by a spouse, children, grandchildren or parents can be attributed to her, and an option to acquire shares is treated as ownership. Shares owned by a nonresident alien, though, are not attributed to a US citizen or resident for these tests.
That last rule makes the British side of the table less risky than founders fear. If the British co-founder's wife or father is a US citizen, his shares are not treated as owned by that relative, so they add nothing to the US total. The Form 5471 instructions also excuse a category 4 or category 5 filer who holds no direct or indirect interest and would file only because of constructive ownership from a nonresident alien. The position changes if the US relative subscribes for shares, because those shares then count in their own right.
The US side works the other way. If the US co-founder's American father takes a small stake to help with early costs, his shares are attributed to her and hers to him, and an equal split between the founders can become a US-held majority. Siblings are outside the family rule. A call option held by the US co-founder over the other founder's shares can also count as ownership, and whether a leaver call that arises only on a future event counts depends on its terms. Our international tax service reads the option and leaver clauses alongside the register.
What does the British co-founder file with the IRS
Nothing, for holding shares in a UK company, while they are not a US person. Form 5471 is filed only by US persons, and a British resident with no US citizenship, green card or US income has no US return to attach it to. Their part in the process is supplying information.
The US co-founder's form needs figures only the company holds: the full accounts and trial balance, a balance sheet at both ends of the year, every share issue and transfer, and transactions between the company and its shareholders. The duty to file stays with the US co-founder. A board that will not release the ledgers does not remove it, which is why the information right belongs in the shareholders' agreement.
The British co-founder's status still needs watching. Someone who takes a US green card or spends enough days in the US to meet the substantial presence test (opens the official IRS page in a new tab) becomes a US person, and the instructions place a person who becomes a US person while holding ten per cent or more in category 3. From then on their shares count towards the US total, and two US founders holding everything between them make the company a controlled foreign corporation. The IRS page on the green card test (opens the official IRS page in a new tab) explains when that status begins.
What happens when a co-founder leaves or joins
The count changes on the day the register changes. A leaver whose shares are bought back or transferred, a new co-founder subscribing for shares, or options being granted or exercised can each move the US-held total across the more-than-half line, or move a founder across the ten per cent line.
Reverse vesting rarely delays the count, because founder shares are usually issued at the start with votes and value, and the leaver provisions decide only what happens if a founder goes. The event is what matters. When a company buys back a leaver's shares and cancels them, the remaining founder's percentage rises without her acquiring anything, so category 3, which turns on acquisitions and disposals, may not apply while categories 4 and 5 can. Our post on growth shares and the 83(b) election covers the income tax side of vesting.
Take a US citizen engineer in Bristol and her British co-founder, who is not a US person, each holding half the ordinary shares. In the first year she files in categories 2 and 3 for her subscription, and the company is not a controlled foreign corporation. In the third year he leaves and the company buys back his shares. She then holds every remaining share, so for that year the company is a controlled foreign corporation and she files in categories 4 and 5, with the net CFC tested income computation that follows.
- Leaver buy-back or transfer: recount votes and value from the completion date
- New co-founder: confirm their US status before the shares are issued
- Option grant or exercise: options can count as ownership before exercise
- Move to the US or a green card: a non-US holder becomes a US person
Which shareholders' agreement clauses protect the US filings
Four clauses do most of the work: an information right timed to the US deadlines, notice of every change to the register, a duty to report changes in US status, and agreement on who pays for US compliance. None of them changes the tax, but each makes the US co-founder's filings possible on time.
Timing matters because UK accounts are often finalised months after the year end, while Form 5471 (opens the official IRS page in a new tab) is due with the US co-founder's return, by 15 June for a filer living abroad and 15 October with an extension. Each missing form carries an initial penalty of $10,000, and the period for assessing the whole return can stay open until the information is supplied. A clause requiring the trial balance and register within a set period after the year end costs the British co-founder very little.
The election clause matters because a two-owner company cannot be treated as a disregarded entity, and the US alternative, partnership classification, changes how the US sees the British co-founder, as our post on check-the-box for a UK Ltd explains. A US co-founder with signing rights over the company's accounts also reports them on the FBAR (opens the official FinCEN page in a new tab), filed with FinCEN, once her foreign accounts together exceed $10,000, as our post on the FBAR for a UK company bank account sets out. Our business incorporation service drafts these points at formation, and the guide to US-UK tax for founders, fund managers and executives covers what follows.
- Information right: full accounts, trial balance, ledgers and register by an agreed date
- Notice of share issues, transfers, buy-backs and option grants within a short period
- Each shareholder to report becoming a US person or a US relative subscribing
- No US entity classification election without both founders' written consent
- US compliance costs borne by the company or the US founder, as agreed
- Confidentiality carve-out for disclosures to the IRS and US advisers
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
