This tax filing season brought a wave of questions about Form 5472. Interest in this complex form was renewed because of recent Treasury Regulations requiring that it be filed by single-member US LLC’s that are foreign owned. Prior to the issuance of these regulations, a single member foreign-owned US LLC was treated as a tax “nothing” with the result that in certain cases, no US tax or information reporting was required. For those who had so many questions about Form 5472, the next few blog posts cover it in great detail.
By way of broad overview, Form 5472 must be filed annually by certain companies (referred to as “reporting corporations”) when there is a so-called “reportable transaction” with a “related party” occurring in that particular tax year. Assuming one has such a “reportable transaction”, the Form is required to be filed by (i) any US company that is at least 25% owned by non-US shareholders (single member US LLCs with foreign owners are now included under recent tax rules; discussed separately in this article), and (ii) foreign companies that are engaged in a US trade or business.
What is Form 5472 Used For?
The US Internal Revenue Service (IRS) uses the Form 5472 in developing information about the company and its related parties. Information provided on the form helps the IRS identify potential audit issues. Form 5472 is the place the IRS starts when auditing foreign-owned businesses in the US. Generally, the purpose of the form is to disclose the nature and amount of foreign and domestic transactions that occur with related-parties, since these types of transactions can give rise to abuse (for example, in transfer-pricing or in attempts to siphon off taxable earnings and profits in disguised non-taxable forms). I believe that Form 5472 can be used proactively. Proper preparation of this form provides the chance to document tax planning, as well as to make that planning more robust in the event of a possible audit.
The US wishes to reduce frequent international accusations that it is actually one of the world’s best tax havens. Furthermore, with the Foreign Account Tax Compliance Act, (“FATCA”) now in full swing, the IRS is anxious to be gathering information that can be traded with those countries who have agreed to be FATCA-compliant. Form 5472 helps meet all of these goals.
In today’s world of global fiscal transparency, it is very important to keep in mind whether the foreign shareholder or foreign related party has reported the income from the listed transactions in its home jurisdiction. The US has entered into numerous tax treaties and tax exchange information agreements. Based on information provided on the Form 5472, an exchange of information by the US with the foreign country may result in the foreign country learning about possible tax transgressions by one of its citizens or tax residents.
What is a “Reportable Transaction”?
As mentioned, the Form is not required to be filed by the company unless it has a “reportable transaction” with a “related party” during the tax year. Transactions occurring in each and every tax year must be examined.
In general, a “reportable transaction” is any exchange of money or property with the foreign shareholder such as a payment for sales, rents, royalties, interest. A “reportable transaction” does not include the payment of dividends.
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”.
Reportable transactions can easily be overlooked – frequently overlooked are loans by the corporation to foreign shareholders, or loans from foreign shareholders to the corporation. Such loans can have very significant tax consequences and if any loans exist, proper US tax advice should be taken.
“Reportable transactions” are listed in Part IV of the Form and are detailed in the instructions to the Form. Form 5472 is attached to the reporting corporation’s income tax return by the due date (including extensions) of the return. A separate Form 5472 must be filed for each foreign or domestic related party with which the reporting corporation had a reportable transaction during the tax year.
Who is a “Related Party”?
The definition of a related party is very broad and relies on numerous provisions in the US tax code. Due to its complexity, professional tax advice should be taken to see if a “related party” is involved. A related party includes any direct or indirect 25% foreign shareholder of the reporting corporation. It also includes any person related to the reporting corporation or to one of the 25% shareholders.
- Foreign Shareholder Owns 25% or More of US Corporation
As mentioned, Form 5472 must be filed by a US corporation in certain circumstances.
It is required when that corporation has direct or indirect non-US shareholders who own 25% or more of the stock, and has a so-called “reportable transaction” with the foreign shareholder(s). The form is not required when various foreign persons own, in the aggregate, 25% or more of the corporation. It is required only when a single non-US entity or individual owns 25% or more of the corporation.
- A) Separate Form for Each Foreign Shareholder
A separate Form 5472 must be filed by the reporting corporation for each foreign shareholder who is a 25%-or-greater owner. Thus, if two or more foreign shareholders each own 25% or more of a US corporation and each had a “reportable transaction” with the company, then multiple Forms 5472 will have to be filed.
- B) Information Required
Form 5472 generally requires the following information with regard to each 25%-or-greater foreign shareholder: name, address and country of citizenship (or in the case of an entity-shareholder, the country where it was organized or incorporated); the nature and amount of the reportable transaction with the foreign shareholder; names of the countries under whose laws the foreign shareholder files an income tax return as a resident; and names of the principal countries where that shareholder conducts business.
Next week’s blog post will cover Form 5472 filings by foreign owned single-member US LLCs, foreign corporations engaged in a US trade or business, penalties for not filing the form, and the nasty surprises that can trap foreign owners of US LLCs who are residing in a community property jurisdiction.
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