On December 13, 2016, the U.S. Treasury Department and Internal Revenue Service issued final regulations mandating that foreign-owned U.S. limited liability companies (and other U.S. business entities) treated as disregarded entities for U.S. tax purposes must file annually Form 5472—Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business—with the U.S. Internal Revenue Service. Prior to these regulations, disregarded U.S. entities wholly-owned by foreign persons generally were not required to file any U.S. tax or information returns.
Form 5472 will be used to collect a variety of information about the foreign-owned disregarded U.S. entity, including total assets of the entity, the direct and ultimate indirect 25-percent foreign owners of the entity and related party transactions. Form 5472 has not yet been revised to take into account the final regulations, which specifically provide that foreign-owned disregarded U.S. entities must file Form 5472 “at such time and in such manner as the Commissioner may prescribe in forms or instructions.” Thus, it is possible that Form 5472 and its instructions may be modified (perhaps significantly) in the coming months to implement the final regulations.
In addition to Form 5472 reporting, foreign-owned disregarded U.S. entities are required under the final regulations to comply with the record maintenance requirements of Internal Revenue Code 6038A pertaining to related party transactions.
The regulations are effective as of the date of their publication (December 13, 2016). However, for ease of administration, the Form 5472 portion of the regulations will apply to taxable years of foreign-owned disregarded U.S. entities beginning after December 31, 2016, and ending on or after December 13, 2017. Thus, as a general matter, Form 5472 will be required for foreign-owned disregarded U.S. entities starting with the 2017 taxable year. However, if a foreign-owned disregarded U.S. entity liquidates (or otherwise terminates its taxable year) before December 13, 2017, the foreign-owned disregarded U.S. entity would not need to file a 2017 Form 5472.
Under the final regulations, the taxable year of a foreign-owned disregarded U.S. entity will be the taxable year of its foreign owner (if the foreign owner is required to file a U.S. tax return). If the foreign owner has no U.S. return filing obligation, the final regulations provide that the taxable year of the foreign-owned disregarded U.S. entity will be the calendar year, unless otherwise provided in forms, instructions or published guidance.
Failure to timely file Form 5472 or maintain the records required by the regulations can result in substantial penalties against the foreign-owned disregarded U.S. entity, including a $10,000 penalty against the foreign-owned disregarded U.S. entity for each violation. This penalty is imposed for each violation, and thus, it can quickly escalate if the foreign-owned disregarded U.S. entity has reportable transactions with more than one related party, each of which is required to be disclosed on a separate Form 5472.
- The preamble to the final regulations states the Form 5472 information “will enhance the United States’ compliance with international standards of transparency and exchange of information for tax purposes and will strengthen the enforcement of U.S. tax laws.” In other words, the ownership and related party transaction information collected by the IRS with the Form 5472 will be shared with foreign country governments pursuant to information-sharing agreements with those countries.
- The final regulations impose the Form 5472 reporting obligation on all foreign-owned U.S. disregarded entities (including U.S. limited liability companies), without the application of several exceptions available to other types of reporting entities. Thus, even those foreign-owned disregarded U.S. entities that have no reportable transactions with related parties and have no US assets or income will be obligated to file Form 5472 and report ownership information.
- These new regulations will likely increase the administrative burdens on the IRS exponentially. For example, every U.S. disregarded entity that needs to file a Form 5472 will now need to obtain a U.S. taxpayer identification number by filing Form SS-4, Application for Employer Identification Number. This process (which currently can take from several days to several weeks once submitted to the IRS) can be complicated, particularly if the U.S. disregarded entity does not have a U.S. person who can serve as a “responsible party” for purposes of line 7 of Form SS-4.
- Some commentators have remarked that the new Form 5472 filing obligation by foreign-owned disregarded U.S. entities is designed primarily to help enforce the laws of other countries, not the United States. This is particularly true in the case of a foreign-owned disregarded U.S. entity with no U.S. assets or income. The IRS, which is already hard-pressed to enforce U.S. tax laws, will likely be even harder-pressed to meet the increased responsibilities it now must meet under the information exchange agreements it has entered with other countries. Time will tell how or whether this obligation to other countries will be accomplished and funded.
Foreign-owned disregarded U.S. entities and their foreign owners should promptly consider the impact of these new reporting and record maintenance requirements, as well as whether a change to their structure is warranted or desired and can be effected before the December 13, 2017, reporting deadline.