The IRS published final regulations that address reporting and recordkeeping obligations of US disregarded entities (e.g., single member LLCs) wholly owned by a non-US person (the Regulations). The Regulations finalize proposed regulations that were issued in May 2016. The Regulations generally follow the proposed regulations with some important modifications. These modifications further limit exemptions, clarify the deemed tax year for disregarded entities, and revise the applicability date. The Regulations apply to tax years beginning on or after 1 January 2017, and ending after 12 December 2017.
The Regulations apply to all existing US disregarded entities that are wholly owned by non-US persons. We recommend clients begin now to review their structures to identify impacted entities, consult with their advisors to ensure their current practices are sufficient to meet the new reporting requirements and, unless further guidance is issued, apply for an EIN for the disregarded entity to identify itself on Form 5472.
The Regulations treat a US disregarded entity that is wholly owned by a non-US person as a corporation solely for purposes of reporting under Code Section 6038A. This means that a US disregarded entity with a non-US owner must file IRS Form 5472 (Information Return of a 25% Foreign-Owned US Corporation or a Foreign Corporation Engaged in a US Trade or Business) to report its non- US owner upon the occurrence of certain reportable transactions. Reportable transactions include certain transactions between the disregarded entity and non- US related persons. 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." Further, any contributions to or distributions from the disregarded entity to a non-US related person are considered a reportable transaction.
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.
Inapplicable Section 6038A Exemptions
The Regulations do not allow a disregarded entity subject to Code Section 6038A to take advantage of the recordkeeping exemptions of Treasury Regulations section 1.6038A(h) (Small corporation exception) or Treasury Regulations section 1.6038A(i) (Safe harbor for reporting corporation with related party transaction of de minimis value). Furthermore, the Regulations do not allow an impacted disregarded entity to take advantage of the Form 5472 reporting requirement exemptions of Treasury Regulations section 1.6038A(e)(3) (Transactions with a corporation subject to reporting under section 6038) or Treasury Regulations section 1.6038A(e)(4) (Transactions with a foreign sales corporation).
Disregarded Entity Tax Year
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.
Beyond Form 5472 Reporting
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. Therefore, the disregarded entity needs 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. For purposes of the SS-4, a responsible party is an individual who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets. The responsible party must have a US social security number (SSN), individual taxpayer identification number (ITIN) or EIN. Otherwise, the responsible party must apply for one. It is important to note that it can often take several months for non-US individuals based outside the United States to obtain an ITIN.
Failure to file a Form 5472 or maintain the supporting records as required could result in a USD 10,000 civil penalty for each failure. Criminal penalties could also apply for failure to submit information or filing false or fraudulent information.