Treasury & IRS Release Final Regulations for Form 5472
By Robert Verzi, partner, and Philip Brudney, manager
On Dec. 13, 2016, the Treasury Department and the IRS released final regulations requiring certain foreign-owned domestic disregarded entities to file Form 5472.
Many foreign-owned domestic disregarded entities previously did not have any reporting or return filing requirements, rendering it difficult for the IRS to obtain information regarding taxpayers pursuant to tax treaties and tax information exchange agreements. Thus, the final regulations are intended to enhance the United States’ compliance with international standards of transparency and exchange of information for tax purposes and will strengthen the enforcement of U.S. tax laws.
No filing was previously required for a disregarded entity formed in the United States and wholly owned by a foreign person if neither the disregarded entity nor its owner received any U.S. source income or was engaged in a U.S. trade or business during the taxable year. An example of a foreign-owned domestic disregarded entity would be a U.S. LLC wholly owned by a foreign person.
The final regulations require a domestic disregarded entity wholly owned by a foreign person to be treated as a domestic corporation separate from its owner for the limited purposes of the reporting, record maintenance and associated compliance requirements that apply to 25 percent foreign-owned domestic corporations under section 6038A of the Internal Revenue Code. These regulations do not change the tax treatment of these entities as disregarded entities for federal income tax purposes.
Under section 6038A and 6038C, the reporting requirements include:
- To file Form 5472 to provide certain information about related foreign persons with which the domestic disregarded entity conducts transactions during the year;
- To maintain records establishing the accuracy of the information return and the correct U.S. tax treatment of the transactions; and
- To obtain an employer identification number (EIN) by filing Form SS-4 (Application for Employer Identification Number).
The explanation of provisions specifies that the generally applicable exceptions to the requirements of section 6038A do not apply in regard to the new reporting requirement.
In addition, the final regulations provide that domestic reporting corporations must have the same tax year as their foreign owner if that foreign owner is required to fulfill a U.S. reporting obligation. If the foreign owner has no U.S. return filing obligation, then the domestic reporting corporation shall report on the calendar year basis.
The final regulations are effective Dec. 13, 2016, and apply to tax years beginning on or after Jan. 1, 2017, and ending on or after Dec. 13, 2017.
If you currently operate in the U.S. through a wholly-owned LLC, you should review whether there are any transactions between the LLC and any related companies that may require Form 5472 to be filed. Although the information to be reported should be easy to gather, the requirement to report may be overlooked. Failure to report foreign ownership and file a Form 5472, or maintain the supporting records as required, will result in a $10,000 penalty per form per year.
Unsure if these final regulations apply to you? Contact Robert Verzi, partner, at firstname.lastname@example.org or 404-898-8486.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.