What is Form 5471 Schedule E-1 used for?

Form 5471 Schedule E-1 tracks the cumulative pool of foreign income taxes a controlled foreign corporation, such as a UK company, has paid, accrued, or had deemed paid on its earnings and profits. It reconciles an opening balance through the current year taxes and deemed-paid reductions to a closing balance, split by separate category of income, so the correct foreign tax credit can later be substantiated on Form 1116 or Form 1118.

Who must file Schedule E-1 with Form 5471?

Category 4 filers and Category 5a and 5b filers of Form 5471 generally complete Schedule E-1 for a foreign corporation, which covers most Americans who control a UK company or are US shareholders of one that is a controlled foreign corporation. Related constructive US shareholders, Categories 1c and 5c, only need to complete Schedule E and can leave Schedule E-1 blank, so the exact requirement depends on which category applies.

How does UK corporation tax get onto Schedule E-1?

UK corporation tax the company pays or accrues to HMRC is first reported, in sterling and US dollars, on Schedule E, Part I, Section 1. The annual total then carries to Schedule E-1, line 4, where it is allocated across the subpart F, tested and residual income columns based on the type of income or earnings and profits the tax relates to for that company.

What is the difference between taxes paid or accrued and taxes deemed paid?

Taxes paid or accrued are the actual UK corporation tax amounts that build the pool, entered on lines 1 through 8. Taxes deemed paid are separate credit events that draw the pool down: line 9 for taxes deemed paid when a US shareholder has a current-year subpart F or GILTI inclusion, and line 10 for taxes deemed paid when the company later makes an actual distribution of previously taxed earnings and profits.

What currency is Schedule E-1 reported in?

Schedule E-1 must be completed in US dollars. Sterling amounts are converted earlier, on Schedule E, Part I, Section 1, using the average exchange rate for the year unless a section 986(a)(1)(D) election is in place to use the exchange rate on the date of payment instead. Once translated, the pool remains a dollar figure and is not retranslated for later currency movements against sterling.

Why must Schedule E-1 always reconcile to zero at year end?

Columns (a), (b) and (c) of Schedule E-1, covering the subpart F, tested and residual income groups, must equal zero on line 16 every year, because any balance not deemed paid through a current-year credit has to be explained and removed through line 15, the reduction for other taxes not deemed paid. A pool that does not reconcile signals a missed deemed-paid credit, a misallocated payment, or an unreported foreign tax redetermination.

Form 5471 Schedule E-1: Taxes Deemed Paid, UK Company

Q: What happens if HMRC changes the corporation tax figure after an enquiry?

An HMRC adjustment to the corporation tax liability of a company after the return was originally filed is treated as a foreign tax redetermination under section 905(c). If the affected US return has not already been amended, the correction is reported on Schedule E-1, line 2, of the Form 5471 for the year in which the redetermination is taken into account, restoring the pool to the correct balance.

Form 5471 Schedule E-1 is the schedule that carries the pool of foreign income taxes of a controlled foreign corporation forward from year to year, reconciling an opening balance through taxes paid or accrued, taxes deemed paid, and reductions down to a closing balance, all split by category of income. For a high-net-worth American who owns a UK company, this is where UK corporation tax the company actually pays becomes usable US foreign tax credit history rather than a number that appears once on a set of statutory accounts and is never tracked again. Schedule E-1 sits on pages 2 and 3 of separate Schedule E, and getting its income-group columns right in year one is what keeps every later year of Form 5471 accurate.

What is Form 5471 Schedule E-1?

Form 5471 Schedule E-1 is titled Taxes Paid, Accrued, or Deemed Paid on Earnings and Profits of Foreign Corporation, and it is printed on the second and third pages of separate Schedule E, the attachment to Form 5471 that a Category 4 or Category 5 filer completes for a foreign corporation such as a UK limited company. The IRS Instructions for Form 5471 direct preparers to use Schedule E-1 to report the cumulative balance of foreign income taxes a controlled foreign corporation has paid or accrued, tracked by separate category of income under section 904(d), so that when the earnings and profits of the company are included in the income of a US shareholder or later distributed, the associated foreign tax can be identified, deemed paid, and claimed as a credit. Schedule E-1 does not compute the foreign tax credit itself. It maintains the ledger that Form 1116 or Form 1118 later draws on.

Where Schedule E-1 sits inside separate Schedule E

Separate Schedule E has three parts. Part I, Section 1 reports taxes the foreign corporation paid or accrued directly, naming the payor entity, the country, the tax category, and both the local-currency and US-dollar amounts. Part I, Section 2 reports taxes deemed paid by the foreign corporation itself on previously taxed earnings and profits it received as a distribution from a lower-tier corporation. Part III reports foreign taxes for which a credit is disallowed, such as amounts suspended under section 909 or reduced under section 901(m). Schedule E-1 then reconciles the totals from Sections 1 and 2 into the running pool: line 4 of Schedule E-1 pulls the total from Part I, Section 1, line 5, column (l), and line 6 pulls the total from Part I, Section 2, line 5, column (i).

The income-group columns on Schedule E-1

Schedule E-1 is built around four columns, plus a further set of sub-columns for previously taxed earnings and profits. Column (a) holds foreign income taxes properly attributable to the subpart F income group. Column (b) holds taxes attributable to the tested income group, the pool tied to global intangible low-taxed income. Column (c) holds taxes attributable to the residual income group, broadly the earnings and profits left over once subpart F and tested income are carved out. Column (d) holds taxes suspended under section 909, the anti-splitter rule that stops a foreign tax credit being claimed before the related income is recognised. Columns (e)(i) through (e)(x) then break out taxes related to previously taxed earnings and profits, known as PTEP, into ten separate PTEP groups that correspond to the columns on separate Schedule J.

Column (a): subpart F income group taxes, attributable to current-year subpart F inclusions of the UK company.
Column (b): tested income group taxes, the pool that ultimately supports the GILTI or net CFC tested income computation.
Column (c): residual income group taxes, attributable to earnings and profits outside subpart F and tested income.
Column (d): suspended taxes under section 909, held out of the credit pool until the related income is taken into account.

Which taxes land in which column is not a matter of preparer judgement. The Instructions direct preparers to separate Schedule Q, the schedule that allocates the income and taxes of a controlled foreign corporation across CFC income groups, to determine the correct attribution before anything is entered on Schedule E-1 for the company.

Reading the pool from opening balance to closing balance

Schedule E-1 runs as a single reconciliation from line 1 to line 16, and every figure after line 1 either adds to or subtracts from the three main income-group columns. Line 1a is the opening balance, which must equal line 16 of the Schedule E-1 for the prior year. Line 1b allows a correction to that opening balance where the prior year figure was wrong, supported by an attached statement, and line 1c is the adjusted opening balance. Line 2 records an adjustment for a foreign tax redetermination. Lines 3a and 3b move taxes between the suspended column and the three main columns as the anti-splitter rules unsuspend or newly suspend them. Line 4 brings in the current year of directly paid or accrued taxes from Schedule E, Part I, Section 1. Line 5 carries over taxes from a prior foreign corporation in certain nonrecognition transactions. Line 6 brings in taxes deemed paid on a PTEP distribution received by the foreign corporation itself, from Schedule E, Part I, Section 2. Line 7 allows other adjustments before the pool is drawn down.

Line 8 totals everything added so far into the current pool of taxes paid or accrued. Lines 9 through 12 then draw the pool down: line 9 for taxes deemed paid on an inclusion, line 10 for taxes deemed paid on an actual distribution, line 11 for taxes reclassified between PTEP groups, and line 12 for any other adjustment. Line 13 is the balance after those reductions. Line 14 is reserved and not currently used. Line 15 forces columns (a), (b) and (c) to reconcile correctly by reducing them for taxes that were never deemed paid, most commonly because the GILTI inclusion percentage of a US shareholder or the statutory 80 per cent limitation left part of the tested income group tax un-credited. Line 16 is the closing balance, and for columns (a), (b) and (c) it must always equal zero, with any residual forced to zero through line 15 and a required statement explaining why.

How UK corporation tax paid by the company feeds the pool

For a UK trading company, the corporation tax it pays or accrues to HMRC is the raw material that populates Schedule E. Part I, Section 1 of Schedule E first captures each payment or accrual: the payor entity, the country to which the tax was paid, the income subject to tax, the amount in sterling, the exchange rate used, and the US-dollar equivalent. The total for the year then flows to Schedule E-1, line 4, where it is allocated across columns (a), (b) and (c) according to whether it relates to the subpart F income, tested income, or residual income of the UK company for that year. A UK company paying corporation tax on ordinary trading profit with no subpart F inclusion in a given year will typically see that tax land mostly in columns (b) and (c), while a company with foreign personal holding company income captured under subpart F will see tax allocated to column (a) instead.

This is also where the pool starts to matter beyond the current year. UK corporation tax that is accrued but not yet paid still enters the pool on Schedule E-1 at the accrual figure. If it is not actually paid within two years of the close of the tax year to which it relates, it is treated as a foreign tax redetermination, which unwinds the earlier credit and requires a correction, most commonly reported on Schedule E-1, line 2, in a later year.

Reconciling a UK accounting period to the US annual accounting period

Form 5471 is filed by reference to the annual accounting period of the foreign corporation, and for a UK company that period is set once the company registers for corporation tax. GOV.UK confirms that a UK corporation tax accounting period cannot be longer than 12 months and is normally the same as the financial year covered by the annual accounts of the company. Where a first set of accounts covers a period longer than 12 months, as often happens after incorporation, HMRC requires two separate Company Tax Returns covering two accounting periods rather than one, because a single UK accounting period is capped at 12 months. That split has a direct knock-on effect for Schedule E-1: if the first HMRC accounting period of the UK company does not match the annual accounting period being reported on that year of Form 5471, the US preparer needs to establish which UK accounting period, or combination of periods, corresponds to the period Form 5471 is reporting, before allocating corporation tax paid or accrued to the correct column and the correct year of Schedule E-1.

The payment timeline compounds the problem. GOV.UK states that corporation tax is normally due nine months and one day after the end of the accounting period for a company with taxable profits up to 1.5 million pounds, with larger companies paying in instalments instead. Because Form 5471 for a US shareholder is typically due with a Form 1040 filed well before that UK payment deadline arrives, the current-year UK corporation tax entered on Schedule E is frequently a taxes-accrued figure rather than a taxes-paid figure, and the final HMRC liability for that period may not be confirmed, let alone settled, when the US return is filed.

Taxes deemed paid on an inclusion versus on a distribution

Taxes paid or accrued and taxes deemed paid are not the same event, and Schedule E-1 keeps them on separate lines because US law treats them separately. Line 9 reports taxes a domestic corporation is deemed to pay when a US shareholder has a current-year inclusion under section 951(a) subpart F income or a section 951A GILTI inclusion, under the deemed-paid mechanics of section 960(a). That credit crystallises the moment the income is included, whether or not the UK company has actually distributed cash to its US owner. Line 10, by contrast, reports taxes a domestic corporation is deemed to pay under section 960(b)(1) with respect to an actual distribution of previously taxed earnings and profits that the shareholder later receives. A withholding tax the UK company suffers when it eventually pays out cash that was already taxed as an inclusion in an earlier year is a line 10 event, entirely separate from the line 9 credit generated when that income was first included.

Both lines are entered as negative numbers on Schedule E-1, because both draw down the accumulated pool rather than adding to it. Confusing the two is a common error: crediting a distribution-year withholding tax as though it were part of the original inclusion-year deemed-paid credit overstates the credit claimed in one year and understates the pool available in the other. Because line 16 in columns (a), (b) and (c) must reconcile to zero, an error of this kind tends to surface only once the pool will no longer balance.

What happens when HMRC adjusts the tax after an enquiry

A UK corporation tax figure entered on Schedule E is rarely the last word. HMRC can open an enquiry into a Company Tax Return, and the outcome can increase the tax due, for example through an assessment, or reduce it through a repayment. Either outcome is a foreign tax redetermination for US purposes. The Instructions for Form 5471 direct that adjustments to the foreign tax credit of a US person resulting from redetermined foreign income taxes, including additional payments, refunds, and downward adjustments for accrued foreign tax that is not paid within two years of the close of the year to which it relates, fall under section 905(c). Where the affected US return has not already been amended to reflect the correction, the adjustment is entered on Schedule E-1, line 2, of the Form 5471 covering the year in which the redetermination is taken into account, rather than by restating a closed prior year schedule.

In practice this means an HMRC enquiry that closes two or three years after the corporation tax return it examined can require the US shareholder to revisit a Schedule E-1 pool that was, until then, treated as settled. Because line 1a of each year of Schedule E-1 must tie to the line 16 of the prior year, a redetermination that is missed in the year it should be reported tends to propagate: every subsequent opening balance carries the error forward until someone corrects it.

Functional currency and translating the pool into US dollars

Sterling is ordinarily the functional currency of a UK company for US tax purposes, but Schedule E-1 itself is not kept in sterling. The form states plainly that amounts on Schedule E-1 must be entered in US dollars. The translation happens one step earlier, on Schedule E, Part I, Section 1, where each tax payment is reported both in the local currency in which it was actually paid and in US dollars, using a conversion rate reported under a divide-by convention, generally the average exchange rate for the year as defined by section 989(b)(3). A separate election is available under section 986(a)(1)(D), reported in Part II of Schedule E, to translate foreign taxes at the exchange rate on the date of payment instead of the average rate, for tax years beginning after 31 December 2004.

Once a tax figure has been converted to US dollars and entered on Schedule E-1, it stays a dollar figure. The pool is not retranslated for exchange-rate movements in later years the way a sterling bank balance would be. A US shareholder who assumes the pool floats with the pound, or who mixes an average-rate figure from one year with a spot-rate figure from another because a section 986(a)(1)(D) election was made only partway through the history of the company, risks a Schedule E-1 that no longer reconciles even though every individual UK tax payment was reported correctly in its own year.

Worked scenario: tracking the pool for a UK trading subsidiary

This is an illustrative scenario, with assumed figures for illustration only. A US citizen wholly owns a UK trading company with a 31 December accounting period that matches her US tax year, so no accounting-period split is in point. In year one, the company pays UK corporation tax that, for illustration, is treated as attributable to its residual income group, translated at an assumed exchange rate to 40,000 US dollars on Schedule E, Part I, Section 1. That figure carries to Schedule E-1, line 4, column (c). Because there is no prior-year balance, line 1a is zero, and line 8 shows 40,000 dollars in column (c). No distribution is made, so lines 9 and 10 are blank, and line 16 in column (c) shows 40,000 dollars carried to year two.

In year two, the shareholder has a section 951A GILTI inclusion with respect to the tested income of the company, and separately the company distributes cash that includes previously taxed earnings and profits from a prior inclusion. Line 9 records a negative figure for the taxes deemed paid on the current inclusion, drawn from column (b), while line 10 records a separate negative figure in the PTEP columns for taxes deemed paid on the distribution itself, reflecting withholding suffered on that payment. Also in year two, HMRC concludes an enquiry into the year-one return and issues a small additional assessment. Because the year-one US return has not been amended, that increase is entered as a positive adjustment on line 2 of the year-two Schedule E-1, in column (c), restoring the pool to what it would have been had the correct UK tax figure been reported originally. Line 16 must again reconcile columns (a), (b) and (c) to zero once every deemed-paid credit and reduction has been applied.

Common mistakes that corrupt the Schedule E-1 pool

Treating UK corporation tax as a single undifferentiated number instead of allocating it across the subpart F, tested and residual income columns using Schedule Q.
Carrying forward a prior year line 16 balance without checking it actually equals the new year line 1a, so an old error is never caught.
Recording a distribution-year withholding tax on line 9 instead of line 10, mixing an inclusion-year deemed-paid credit with a later distribution-year one.
Failing to report a foreign tax redetermination on line 2 after an HMRC enquiry adjusts a prior year of corporation tax, leaving the pool permanently out of balance.
Mixing average-rate and spot-rate US-dollar translations across years without a documented section 986(a)(1)(D) election covering the change.
Leaving line 15 blank when the deemed-paid credit for the tested income group was limited by the inclusion percentage or the 80 per cent limitation, so line 16 in column (b) fails to reach zero.

Each of these errors is invisible in the year it happens, because Schedule E-1 does not reject a return for failing to reconcile to zero. It surfaces later, when the shareholder tries to substantiate a foreign tax credit and the pool the credit is supposed to be drawn from does not support the amount claimed.

Building a defensible Schedule E-1 history for a UK company

Preparing Schedule E-1 correctly starts before the numbers for the current year are touched. Confirm the HMRC accounting period of the UK company against the annual accounting period being reported on Form 5471, rebuild the prior year closing balance where an incomplete Schedule E-1 history exists, and allocate each year of corporation tax across the subpart F, tested and residual income columns using the underlying Schedule Q workings rather than a single lump sum. Where a UK enquiry has adjusted an earlier year of corporation tax, identify the correct year for a foreign tax redetermination rather than letting the pool drift out of balance. For a high-net-worth American who owns or controls a UK company, Form 5471 Schedule E-1 is not a form that can be started fresh each season; where the tax pool of the company has never been tracked, the history has to be built and reconciled alongside the rest of the Form 5471 compliance and the wider IRS filing obligations.