The new regulations expand the filing requirements for Form 5472 to include disregarded entities with foreign owners when there are certain reportable transactions.
If a non-U.S. person (individual or corporation) owns 100 percent of the stock of a U.S. corporate subsidiary, the subsidiary needs to obtain an employer identification number (EIN) and maintain adequate books and records to be able to prepare its tax return and Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business), on which the ownership of the non-U.S. owner is reported, along with certain related party transactions. New reporting requirements finalized on December 13, 20161 now extend those rules to disregarded entities. A “disregarded entity” is a company, other than a corporation formed under state law, with a single owner that is not treated as an entity separate from its owner for U.S. federal tax purposes. For example, an LLC with only one owner is disregarded for U.S. federal tax purposes, unless it elects to be classified as a corporation.
Foreign investors often use an LLC to buy assets in the United States. Investors typically do this for the limited liability benefit and the privacy it allows. If a foreign investor used an LLC to simply buy and hold property without renting it, prior to the new rules, the investor did not need to enter the U.S. tax system until the property was sold. This could allow foreign investors to hide assets and income from their local tax authorities and opened a potential avenue for using the disregarded LLC as a money-laundering vehicle.
The new regulations expand the filing requirements for Form 5472 to include disregarded entities with foreign owners when there are certain “reportable transactions.” Reportable transactions include property sales, licenses, leases, loans and payments in connection with forming, acquiring or disposing of the entity.
The IRS can then use the information provided on Form 5472 to enforce U.S. tax laws. Also, the Department of the Treasury can exchange the information with other governments under tax treaties, inter-governmental agreements (e.g., information exchange agreements entered into under the Foreign Account Tax Compliance Act) and other taxpayer information exchange agreements, decreasing the likelihood of foreign tax evasion.
In addition to filing Form 5472, the disregarded entity will also be required to maintain records and obtain an EIN. Disregarded entities will be required to keep records to establish the proper treatment of reportable transactions. The application for an EIN will also require the disregarded entity to identify a responsible party, which is generally the individual who has control or manages the entity. The regulations do provide exceptions for certain small corporations and de minimis transactions.
These new reporting requirements are effective for taxable years beginning on or after January 1, 2017 and ending on or after December 13, 2017. Foreign-owned disregarded entities should obtain advice regarding whether they have any reporting requirements and to ensure they are maintaining appropriate records, and should obtain an EIN if they have not yet done so.