In December 2016, final regulations were passed by the IRS requiring foreign-owned US Disregarded Entities, ex. LLC’s, to file an information return, Form 5472, with the IRS. Prior to this change only US entities or foreign corporations, who are engaged in US trade or business and taxed as a corporation, were required to file the form. The new regulations treat a Disregarded Entity as a Domestic Corporation for these reporting purposes. Thus, any Disregarded Entity with 25%, or more, foreign ownership must comply with the new regulations.
The changes are intended to provide the IRS with improved access to information that it needs to satisfy its obligations under US tax treaties, tax information exchange agreements and similar international agreements, as well as to strengthen the enforcement of US tax laws.
It is important to note that, Form 5472 is an information return for tax purposes; the new regulations do not create a new tax obligation; and that single member LLC’s remain disregarded for income tax purposes. An LLC that existed before the new requirement may not have to file Form 5472 if it does not have any reportable transactions, but once such a transaction takes place, Form 5472 will need to be filed. A “reportable transaction” is any exchange of money or property with the foreign shareholder such as a payment for sales, rents, royalties, or interest but excludes the payment of dividends. Note: The creation of a single-member LLC whose sole member is not a US person is itself a reportable transaction, and creates the requirement to file Form 5472 in the first year of existence.
What is required to comply with the new regulations? Starting January 1st 2017 disregarded entities must:
– Obtain an EIN (Employer Identification Number) by filing a Form SS-4 with responsible party information, including the responsible party’s social security number (SSN), individual taxpayer identification number (ITIN) or EIN.
– Maintain related records, for reportable transactions with the entities’ foreign owners or other foreign-related parties
Are there any penalties for non-compliance?
Yes! A penalty of $10,000 will be assessed on any reporting corporation that fails to file Form 5472 when it is due and in the manner prescribed. The penalty also applies for failure to maintain records as required by Regulations section 1.6038A-3.
You may view the regulations yourself and any additional details from the federal register published in December of 2016; we have included the link for your convenience. https://www.gpo.gov/fdsys/pkg/FR-2016-12-13/pdf/2016-29641.pdf
Foreign-owned Disregarded Entities (LLC’s) may wish to terminate their US LLC. Dissolving or withdrawing the entity from the US may not relieve you from the filing requirement as they were active during the reporting year. If a foreign-owned entity intends to continue engaging in US trade or business they should prepare for the reporting requirements.
Please contact us for guidance on this matter or consult with your tax advisor for advice specific to your company.