Does a US founder still file Form 5471 in the year a funding round ends CFC status?

Usually yes. Category 4 applies to a US person who had control of the foreign corporation during its annual accounting period, and Category 5 applies to a US shareholder who owned stock on the last day in the year on which the corporation was a CFC. A founder who controlled the company until the round closed normally meets both and files a full Form 5471 for that period.

Is dilution below 10% a Category 3 disposal on Form 5471?

The Form 5471 instructions describe a Category 3 filer as a US person who disposes of sufficient stock to reduce his or her interest to less than the 10% stock ownership requirement. They do not mention a reduction caused only by the company issuing new shares. Pure dilution is therefore not a listed event, but a secondary sale, buyback or share exchange in the same round is a disposal.

When does a UK company stop being a CFC after raising investment?

A UK company stops being a CFC when US shareholders, meaning US persons who each own 10% or more by vote or value, together no longer own more than 50% of the total combined voting power or total value of its stock. Both measures must be checked, because weighted founder votes or restricted investor votes can keep voting power above 50% after the share count has fallen.

Do I report UK company shares on Form 8938 once Form 5471 stops?

Directly held shares in a foreign corporation are a specified foreign financial asset. For a US taxpayer living abroad, Form 8938 is required when total specified foreign financial assets exceed $200,000 on the last day of the tax year or $300,000 at any time for an unmarried filer, and $400,000 or $600,000 for a married couple filing jointly, according to IRS guidance.

What UK filing records the date new shares were issued in a round?

The return of allotment, form SH01, filed at Companies House. Section 555 of the Companies Act 2006 requires a company that allots shares to deliver the return to the registrar within one month of the allotment. The filed SH01 and its statement of capital give independent evidence of the allotment date and share totals used in the US ownership tests.

Can my UK startup become a PFIC after it stops being a CFC?

It can. While a company is a CFC and the founder is a US shareholder, an overlap rule generally keeps the founder outside the PFIC regime. Once CFC status ends, the company must be tested each year. A trading company normally passes, but a newly funded company holding mostly cash with little trading income can fail, bringing Form 8621 reporting into play.

Form 5471 After a UK Funding Round Dilutes a US Founder

Form 5471 does not stop the moment a UK funding round dilutes a US founder, and the year of the round is usually the most demanding filing of all. If new shares issued to non-US investors take US shareholders to 50% or less of both vote and value, the company stops being a controlled foreign corporation from that point, but the founder normally still files a full Form 5471 for that accounting period, with a part-year share of the company's income. What happens afterwards depends on where the founder's percentage lands, who the investors are, and whether anyone actually bought or sold stock. This guide follows the current Instructions for Form 5471 (revised December 2025) at https://www.irs.gov/instructions/i5471 and the order in which we apply the tests in the returns we prepare.

What does a funding round change for Form 5471 purposes?

A funding round changes the denominator. The founder holds the same number of shares the day after closing as the day before, but every percentage test is re-run on a larger total. Four tests matter, each measured by vote or by value, whichever gives the higher answer. Only US persons who each hold 10% or more count towards the CFC test, so three US angels at 4% each add nothing to it.

The 10% test. The instructions describe a US shareholder as a US person who owns, directly, indirectly or constructively, 10% or more of the total combined voting power or 10% or more of the total value of all classes of the corporation's stock.
The more than 50% test. A controlled foreign corporation (CFC) is a foreign corporation in which US shareholders together own more than 50% of the total combined voting power or more than 50% of the total value of the stock on any day of the corporation's tax year.
The control test for Category 4. A US person has control when that one person owns more than 50% of the total combined voting power of the voting stock, or more than 50% of the total value of the stock.
The stock ownership requirement for Categories 2 and 3. A US person meets it by owning 10% or more of the total value of the stock or 10% or more of the total combined voting power of the voting stock.

Which Form 5471 filer categories apply before the round, after it, and in the year of change?

Before the round, a US founder who owns more than half of a UK company is normally both a Category 4 filer and a Category 5a filer. Category 4 covers a US person who had control of the foreign corporation during its annual accounting period. Category 5 covers a US shareholder who owned stock in a foreign corporation that was a CFC at any time during the corporation's tax year ending with or within the shareholder's own tax year, and who owned that stock on the last day in that year in which the corporation was a CFC. Where a filer meets both Category 4 and Category 5a, only the Category 4 box is checked, and the instructions say that a filer described in more than one category should not duplicate information.

In the year of change, both categories usually still apply. The Category 4 definition looks at control during the accounting period, not on its last day, and the current instructions contain no minimum holding period for that control. The Category 5 wording points the same way: the company was a CFC for part of the year, and the founder owned stock on the last day on which it was one. The year of the round is a full Category 4 return. After the round, clients fall into four outcomes.

Founder still above 50% by vote or value. Nothing changes. Category 4 and 5a continue, and the round shows up only in the share numbers on Schedules A and B.
Founder at 50% or less, but US shareholders together still above 50%, typically because a US co-founder or US investor also holds 10% or more. The company remains a CFC and the founder continues as a Category 5a filer with a narrower set of schedules.
Founder between 10% and 50%, and the company no longer a CFC. Once the year of change has been filed, there is generally no annual Form 5471 requirement, although a later acquisition or disposal can trigger Category 3.
Founder below 10%. The founder is no longer a US shareholder, and any later reporting is event-driven.

One caution on the third outcome. The instructions also define a Category 5b filer: an unrelated US shareholder who owns stock directly or indirectly in a foreign-controlled CFC. A UK company can be treated as a CFC through attribution rules where a non-US corporate investor that controls it also owns US subsidiaries, so a majority corporate investor's group structure has to be checked as well as the cap table.

Does dilution with no sale trigger Category 3 and Schedule O?

On the wording of the instructions, dilution alone is not one of the listed Category 3 events. Category 3 is built around a US person doing something with stock. The instructions list a US person who acquires stock which, when added to stock already owned, meets the 10% stock ownership requirement; a US person who acquires stock that meets the requirement without regard to stock already owned; a person who becomes a US person while meeting the requirement; and a US person who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the stock ownership requirement. A fifth entry concerns a specialised insurance rule.

A founder diluted from 70% to 47% has neither acquired nor disposed of anything and remains above 10%, so no Schedule O is filed because of the round. The harder case is a founder who falls through the 10% line purely by dilution, for example from 11% to 8% across a Series A. Schedule O, Part II, Section D is, in the words of the instructions, to be completed by shareholders who dispose of their interest, in whole or in part, in a foreign corporation. A founder whose share count is unchanged has not disposed of stock in the ordinary sense, and the instructions say nothing specific about a reduction caused by the company issuing shares to other people. We do not treat pure dilution as a Category 3 disposal by default, but we record the analysis on file.

These are the round mechanics that do create a Category 2 or Category 3 event.

A secondary sale. Founders frequently sell a slice of their own shares to incoming investors alongside the primary issue. That is a disposition, and if it takes the founder below 10% it is a Category 3 event reported on Schedule O, Part II.
A company buyback or redemption of founder shares as part of the round, which is also a disposal by the founder.
A share-for-share exchange into a new holding company, where the founder disposes of one holding and acquires another.
The founder's own loan note converting, or the founder exercising options. That is an acquisition of stock by a US person and is tested against the Category 3 acquisition entries.
A US investor taking 10% or more. A US citizen or resident who is an officer or director of the company is a Category 2 filer when a US person acquires stock meeting the 10% requirement, and completes Schedule O, Part I. The instructions treat an unqualified right to receive stock as an acquisition even before the shares are issued.

Where Category 3 does apply, Category 3 filers must also attach a statement giving the amount and type of any indebtedness the foreign corporation has with related persons, and the name, address, identifying number and number of shares subscribed to by each subscriber to the corporation's stock. In a funding round that statement is drawn straight from the subscription agreement.

How do the vote and value tests treat preference rights, convertible loan notes and options?

Preference rights mostly affect value. A liquidation preference or preferred dividend makes each investor share worth more than each ordinary share, so the founder's share of total value is usually lower than the founder's share of the share count. That has to be shown by a defensible valuation at the relevant date, not assumed.

Voting rights can work the other way. If the founder's ordinary shares carry weighted votes, or the investor class votes only on limited matters, the founder may keep more than 50% of the voting power while holding well under half of the equity, and nothing changes for Form 5471. The US rules look at real voting power, including the ability to elect the board, so investor director appointment rights and consent matters in the shareholders' agreement are read alongside the articles.

Convertible loan notes and advance subscription agreements are generally not stock until they convert, so a note round on its own does not usually move the percentages. The conversion date is what matters, and it frequently falls at the next priced round, so two layers of dilution arrive on the same day. Options need separate care, because the constructive ownership rules can treat an option holder as owning the underlying shares. An unallocated option pool is not anyone's stock, but options held by the founder or the founder's US family members can raise the tested percentage above the cap table figure.

What happens to subpart F and tested income when CFC status ends mid-year?

The founder is taxed on a part-year share, not a full-year share and not nil. Losing CFC status on the day the round closes does not wipe out the income the company earned as a CFC earlier in the same accounting period. The founder reports a pro rata share of subpart F income and tested income for the portion of the year in which the company was a CFC, computed through Schedule I and its worksheets.

The mechanics of the pro rata share were rewritten by Public Law 119-21. Under the earlier rule, the inclusion fell on the US shareholder who owned the stock on the last day in the year on which the corporation was a CFC, scaled down for the part of the year when it was not one. The amended rule, for later tax years of the foreign corporation, attaches the inclusion to the period during which the person owned the stock, was a US shareholder and the corporation was a CFC. The December 2025 instructions flag a Pro Rata Share Transition Rule and refer filers to Notice 2025-75 at https://www.irs.gov/pub/irs-drop/n-25-75.pdf. For a founder who held throughout and was simply diluted, both versions lead to broadly the same place: income up to the round at the pre-round percentage. In practice the UK company needs a profit figure to the closing date, from management accounts or a reasonable apportionment, with the method noted on file.

How do Schedule A and Schedule B of Form 5471 change in the year of the round?

Schedule A reports the stock of the foreign corporation, class by class, with the number of shares issued and outstanding at the beginning and at the end of the annual accounting period. A round shows up as a larger closing figure for any class that was issued and a new line for each class created for investors. The class description should match the articles of association as amended for the round.

Schedule B has two parts. The instructions state that Category 3 and Category 4 filers must complete Part I, which deals with US shareholders and includes each shareholder's allocable percentage of the corporation's subpart F income. Part II, on direct shareholders, must be completed by Category 1a, 1c, 3, 4, 5a and 5c filers. The two schedules have to be prepared together, because an unchanged founder share count beside a part-year income percentage only makes sense once Schedule A shows the new issue.

Worked scenario: a dated cap table across a seed round and a Series A

This is an illustration with invented figures. A US citizen living in London founded a UK limited company with a UK co-founder. The company's accounting period is the calendar year and no other US person holds shares. All investors are non-US individuals and funds with no US entities in their structures. Every share of every class carries one vote, and the investor shares carry a simple liquidation preference.

1 January 2026: 1,000,000 ordinary shares in issue. US founder 700,000 (70%), UK co-founder 300,000 (30%). The company is a CFC and the founder is a Category 4 and 5a filer.
30 June 2026: seed round closes. 500,000 seed preferred shares are allotted to UK and EU investors, giving 1,500,000 shares in issue. US founder 700,000 (46.67%), UK co-founder 300,000 (20%), investors 500,000 (33.33%).
31 December 2026: accounting period ends with no further changes.
15 September 2027: Series A closes. 500,000 Series A preferred shares are allotted to non-US investors, giving 2,000,000 shares in issue. US founder 700,000 (35%).

For 2026, the founder had control from 1 January until the seed round closed, so Category 4 applies. The company was a CFC for part of the year and the founder owned stock on the last day it was one, so Category 5a applies as well, with only the Category 4 box checked. The founder files the complete Form 5471 with the 2026 US return. Schedule A shows 1,000,000 ordinary shares at both dates and a seed preferred class moving from nil to 500,000. Schedule I carries a pro rata share of subpart F and tested income for roughly the first half of the year at 70%. No Schedule O is filed: the founder did not acquire or dispose of stock, remains above 10%, and no US person acquired 10% or more. Had a US fund taken 10% or more of the seed round, the founder, as a director, would have been a Category 2 filer with a Schedule O, Part I, and the CFC test would have been re-run with that fund's percentage added.

For 2027, the founder holds 46.67% and then 35% by vote, and the liquidation preference means the value percentage is, if anything, lower. The company is not a CFC at any time in the year and the founder had no control during the period, so on these facts there is no Form 5471 for 2027. Attention moves to Form 8938 and the passive foreign investment company question.

When does Form 5471 stop, and what still has to be filed?

Form 5471 stops for accounting periods in which the founder fits none of the filer categories: no control at any time in the period, no CFC status at any time in the period, and no reportable acquisition or disposition. Form 5471 is attached to the income tax return and due with it, including extensions, as set out at https://www.irs.gov/forms-pubs/about-form-5471.

The penalty position is the reason not to guess. The instructions state a $10,000 penalty for each annual accounting period of each foreign corporation for failure to furnish the section 6038 information, and a separate $10,000 penalty for each failure to report a transaction required under section 6046, each with further $10,000 amounts for every 30-day period the failure continues beyond 90 days after IRS notice, up to an additional $50,000. Stopping a year early is a section 6038 problem; missing a Schedule O event is a section 6046 problem.

Once Form 5471 falls away, the shares themselves become reportable in another place. Shares in a UK company held directly, outside a financial account, are a specified foreign financial asset for Form 8938. The IRS comparison page at https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements gives the thresholds for taxpayers living outside the United States: for an unmarried filer, or a married person filing separately, total specified foreign financial assets of more than $200,000 on the last day of the tax year or more than $300,000 at any time during it, and for a married couple filing jointly, more than $400,000 on the last day or more than $600,000 at any time. A priced round hands the founder a per-share value, so a substantial stake can clear those figures on paper even where the founder has received no cash.

The same IRS page confirms that foreign stock held directly is not reportable on the FBAR. A founder who can sign on the company's UK bank accounts still has signature authority over foreign financial accounts, and the FBAR applies where the aggregate value of foreign financial accounts exceeds $10,000 at any time in the calendar year. FinCEN's page is at https://www.fincen.gov/report-foreign-bank-and-financial-accounts.

The less comfortable question is whether the company is now a passive foreign investment company. While a company is a CFC and the founder is a US shareholder, an overlap rule generally keeps the founder out of the PFIC regime. When CFC status ends, that protection ends with it. A trading company is not normally a PFIC, but an early-stage company that has just banked a large round, holds most of its balance sheet in cash and has little trading income can fail the passive income or passive asset tests in a given year. The test has to be run each year after the round, and where it is failed Form 8621 applies; see https://www.irs.gov/forms-pubs/about-form-8621 for the form and instructions. The elections that soften the PFIC rules are time-sensitive and some depend on information the company must agree to provide, so we ask founders to secure an information right in the shareholders' agreement before signing.

What records should a US founder keep from the round?

Every conclusion above is a factual finding about the company's share capital on particular dates, and the IRS can ask for the evidence years later. The UK filings give a ready-made spine for the file. Under section 555 of the Companies Act 2006, at https://www.legislation.gov.uk/ukpga/2006/46/section/555, a company that allots shares must deliver a return of the allotment to the registrar within one month, and Companies House publishes the SH01 return of allotment form at https://www.gov.uk/government/publications/return-of-allotment-of-shares-sh01. The filed SH01 fixes the allotment date and the statement of capital after the round.

A dated cap table immediately before and after each closing, showing every class, every holder and each holder's US or non-US status.
The articles of association as adopted for the round, which define the voting, dividend and liquidation rights that drive the vote and value tests.
The subscription agreement and shareholders' agreement, for the subscriber details a Category 3 statement requires and for board appointment and consent rights.
The filed SH01 and updated register of members, as independent evidence of the allotment date.
Loan note and advance subscription instruments with conversion dates, and option documents for the founder and any US family members.
Written confirmation from each significant investor of its US or non-US status and whether it has US subsidiaries, which is the only practical way to test the 5b point.
Management accounts or an apportionment working to the closing date, and the valuation used for the round.
A short memorandum, written at the time, recording which filer categories were considered for the year and why each did or did not apply.

What goes wrong most often after a round, and how is it fixed?

The errors we correct most often are filing nothing for the year of the round, continuing to file as a Category 4 filer for years after control has gone, testing on share count alone, and overlooking a small secondary sale or note conversion. Where earlier years were missed and the omissions were non-wilful, a founder living in the UK commonly brings late information returns up to date within the Streamlined Foreign Offshore Procedures, which carry no offshore penalty, alongside any missing FBARs filed through FinCEN's BSA E-Filing System. For a planned round, the efficient order is to fix the post-closing cap table, run the vote and value tests for each date, decide the filer categories for the year of change, and then prepare Form 5471 and the US return together. That is the preparation and compliance work we carry out for US founders of UK companies.