The US Internal Revenue Service (IRS) recently published final regulations (the “Regulations”) under section 6038A of the Internal Revenue Code that address reporting and recordkeeping obligations of US disregarded entities (e.g., single member US LLCs) that are wholly owned by a foreign (i.e., non-US) person. The Regulations now subject foreign-owned single-member US LLC’s to a brand new regime that has been in the pipeline for a while. These LLCs are now subject to the same reporting, record maintenance and other related compliance requirements as those imposed on 25% foreign-owned US corporations.
Why Were the Regulations Issued?
The new Regulations are simply the latest in a series of efforts by the United States to expand the disclosure required by foreign investors into the US and to quell the growing international criticism of the US, as being one of the world’s greatest tax havens. for foreigners. Information gathered via the Form 5472 will be shared by the US with the governments of any foreign country that is a signatory to a relevant tax treaty or information-sharing agreement.
The Regulations apply to tax years beginning on or after January 1, 2017, and ending after December 12, 2017. Thus, as a general matter, Form 5472 will be required for foreign-owned disregarded US entities starting with the 2017 taxable year (this means the Form will be due in 2018). Due to the wording of the statute’s applicability, if a single-member foreign-owned disregarded US entity ended its tax year before December 13, 2017 filing of the Form 5472 would not be required (e.g., if the LLC was to be liquidated before that date).
The Regulations treat a US disregarded entity that is wholly owned by a non- U.S. person as a “corporation” solely for purposes of reporting under Internal Revenue Code Section 6038A. Such US disregarded entity with a non-US owner must now file IRS Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) to report details, including the identity of its non-US owner, when there is a “reportable transaction” occurring in the tax year. If there is no “reportable transaction” in the particular tax year, the Form need not be filed. Form 5472 is here and Instructions to Form 5472 here.
No Exceptions Available
Some people have wondered if the Regulations have any type of carve-out for any US disregarded entities (such as small ones or those without bank accounts etc.). The Regulations do not permit a disregarded entity subject to Code Section 6038A to take advantage of certain exemptions in the Regulations.
This is so because the intent of the new regulations was to broaden the scope of reporting for disregarded single-member foreign owned US LLCs. The reporting for these entities was intended to go beyond what would be required to be reported on the Form 5472 for a C-corporation that is 25% foreign-owned.
The key will be finding a “reportable transaction” that triggers filing of the Form.
What is a “Reportable Transaction”?
Reportable transactions include certain transactions between the disregarded entity and non- US related persons. Pursuant to the Regulations, a reportable transaction includes “any sale, assignment, lease, license, loan, advance, contribution, or other transfer of any interest in or a right to use any property or money, as well as the performance of any services for the benefit of, or on behalf of, another taxpayer.” Any amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the entity (including contributions to and distributions from the entity) are also captured as “reportable transactions”.
Transactions occurring in each and every tax year must be examined.
Typical “Reportable Transactions”
First, it’s important to understand that not everything will be a “reportable transaction”. For example, simply maintaining a bank account is not a reportable transaction. If, however, the amount in the foreign bank account exceeds USD10,000 at any time in the year, the entity must still file the FBAR. The two forms reflect completely separate filing requirements!
Typical examples of a “reportable transaction” requiring the entity to file Form 5472 for the year the transaction occurs would include creation of the LLC and capitalizing it; liquidating the entity; paying expenses on behalf of the LLC (for example, real property taxes or other costs). A reporting obligation can arise in the extremely common case when the shareholder simply takes cash from the LLC’s bank account. Remember, the intent of the new rules is to broaden the reporting required of single member LLCs and payment of a dividend triggers the reporting.
Disregarded Entity’s Tax Year / Due Date to File Form 5472
The Regulations clarify that for purposes of filing Form 5472, disregarded entities are deemed to have: (1) the same tax year as their non-US owner if the non-US owner has US return filing obligations; and (2) a calendar-year tax year if the non-US owner does not have US return filing obligations.
As indicated in the Regulations, further guidance from the IRS will be forthcoming about filing. So, let’s wait for those.
In addition to filing Form 5472, the disregarded entity must keep permanent books of account and other records as prescribed under Code Section 6038A. The purpose of this requirement is to ensure the entity maintains records sufficient to establish the accuracy of the information reported on Form 5472 and the correct US tax treatment of reportable transactions.
Obtaining “Employer Identification Number” (EIN)
Unless further guidance is issued stating otherwise, an impacted disregarded entity is required to obtain a US taxpayer identification number (an employer identification number, or EIN) to identify itself on its Form 5472. This will be easier said than done due to the need for the entity to file a Form SS-4 to get an EIN. The Form SS-4 requires the applicant to indicate a responsible party of the entity and this can get complicated as SS-4 then asks for an EIN, ITIN or SSN of the responsible party. This has generated confusion among professionals when the LLC is wholly-owned by a nonresident alien individual (NRA) who is the “responsible party”. Apparently, an ITIN is not mandatory when the LLC has a single NRA owner-responsible party. More detail here.
What Happens if You Don’t Comply?
Failure to file a Form 5472 or maintain the supporting records as required could result in a $10,000 civil penalty for each failure. Criminal penalties could also apply for failure to submit information or filing false or fraudulent information.
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