On May 5, 2016, the U.S. Treasury Department announced several actions intended to strengthen financial transparency, including the issuance of proposed regulations that significantly increase the reporting and record maintenance requirements of U.S. disregarded entities owned by foreign persons.
The proposed regulations, which were published in the Federal Register on May 10, 2016, would treat a domestic (U.S.) disregarded entity wholly-owned by a foreign entity or individual (“DDE”) as a U.S. domestic corporation separate from its owner for the purposes of the reporting, record maintenance and associated compliance requirements that already apply to 25-percent foreign-owned U.S. domestic corporations. The proposed regulations are intended to provide the Internal Revenue Service (“IRS”) with improved access to information that it needs to satisfy obligations under U.S. tax treaties, tax information exchange agreements and similar international agreements, as well as to strengthen the enforcement of U.S. tax laws.
Specifically under the proposed regulations, a DDE would be required to:
- obtain a U.S. tax identification number by filing with the IRS Form SS-4, Application for Employer Identification Number (EIN), identifying a “responsible party” with respect to the DDE;
- annually 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 (Under Sections 6038A and 6038C of the Internal Revenue Code), with respect to reportable transactions between the entity and its foreign owner or foreign related parties, regardless of whether such transactions would be subject to U.S. federal income taxation; and
- maintain records sufficient to establish the accuracy of the IRS Form 5472 and the correct U.S. tax treatment of such transactions.
If finalized, these proposed regulations would significantly change the rules currently applied to DDEs, which currently do not generally require any U.S. federal income tax reporting or record maintenance by many DDEs. The information gathered by the IRS would be made available to specified foreign governmental authorities as specifically authorized under various information sharing agreements that the United States has with such governments.
If finalized, the proposed regulations would be applicable for taxable years on or after the date that is 12 months after the date the regulations are published as final regulations. At this time, we do not know if or when these regulations will be finalized. While no action need be taken now, DDEs and their foreign owners may want to consult their U.S. tax advisors at this time to consider whether their current structures will continue to accomplish their goals if these proposed regulations are finalized.