Technical Tax Blog

 


New Reporting Requirements by Foreign Disregarded
Entity

On December 13, 2016, The United States (US) Treasury Department (Treasury) and Internal Revenue Service (IRS) issued final regulations (TD 9796) that treat domestic disregarded entities wholly owned, directly or indirectly, by foreign persons as domestic corporations solely for purposes of making them subject to the reporting requirements under Internal Revenue Code1 Section 6038A that apply to 25% foreign-owned domestic corporations.

The new regulation require U.S. disregarded entities owned by a foreign person to file U.S. Federal Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business . The new Form 5472 filing requirement applies for tax years beginning after December 31, 2016 and ending on or after December 13, 2017.

Under U.S. tax regulations, an entity, such as a U.S. Limited Liability Company (LLC), that has a single owner and is not classified as a corporation is generally disregarded as separate from its owner (a disregarded entity). Disregarded entities are generally not subject to US tax filing requirements

A U.S. LLC that is owned solely by a foreign person / foreign party is called a “reportable disregarded entity.”

Every LLC that is a reportable disregarded entity will 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.

Translation: LLCs that are reportable disregarded entities will be treated as corporations with respect to the reporting obligations under section 6038A.

 

Additional Reporting For Foreign Owned Disregarded Entities

A reportable disregarded entity that has one or more “reportable transactions” with a related party”; being the foreign person / foreign party during a tax year must file an IRS Form 5472 see the instructions) along with an IRS Form 1120. A reportable transaction is:

Any type of transaction listed in Part IV [of Form 5472] (e.g., sales, rents, etc.) for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year, or

  • Any transaction or group of transactions listed in Part IV [of Form 5472], if . . . Any part of the consideration paid or received was not monetary consideration, or . . . Less than full consideration was paid or received.$10,000 IRS Penalty for Failing to File the Form 5472 Timely
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An LLC that is a reportable disregarded entity must file its Form 5472 and Form 1120 each year by the due date of the return or the LLC will be liable to pay the IRS a penalty of $10,000. If the IRS notifies the LLC that its Form 5472 is late the LLC must file the Form 5472 within 90 days of the notice or the LLC will be liable for an additional penalty of $10,000 plus $10,000 for every thirty days or portion thereof after the expiration of the 90 day notice period in which the Form 5472 is not filed. An incomplete or inaccurate Form 5472 is treated as a non-filing that causes the LLC to be subject to the late filing penalties.

The IRS is now automatically assessing an initial penalty of $10,000 for each failure to timely file a Form 5472. A separate Form 5472 is required to report each related party with which the taxpayer had a reportable transaction during a taxable year. Thus, penalties can multiply quickly. A penalty also applies for failure to maintain records as required under U.S. tax law.