New IRS Form 5472 Reporting Requirements for Certain Foreign-Owned Disregarded Entities
U.S. single member LLCs and other domestic (U.S.) disregarded entities that are directly or indirectly wholly owned by foreign owners will now be required to file Internal Revenue Service ("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, to report their foreign owners and certain related party transactions. The final Treasury Regulations are effective for tax years beginning on or after January 1, 2017, and ending on or after December 13, 2017 (i.e., the first filing under the final Treasury Regulations would be due in early 2018). Under the new rules, many domestic disregarded entities with foreign owners that previously had no U.S. return filing obligation will now be required to obtain an Employer Identification Number and file Form 5472. Domestic disregarded entities with foreign owners will continue to be treated as disregarded for most U.S. federal income tax purposes, but will be treated as domestic corporations separate from their owners for Form 5472 reporting and compliance purposes.
Prior to the issuance of the final Treasury Regulations (T.D. 9796) in December of 2016, only U.S. corporations that were 25% or more foreign-owned and foreign corporations engaged in U.S. trades or businesses were required to report the name, address and other identifying information of the foreign owner, as well as information on certain "reportable transactions" with its foreign owners and other related parties. The Final Regulations significantly expand the class of "reportable transactions" for domestic disregarded entities with foreign owners to include, any sale, assignment, lease, license, loan, advance, contribution, or any other transfer of any interest in or a right to use any property (whether tangible or intangible, real or personal) or money, and the performance of any services for the benefit of, or on behalf of, another taxpayer. The Treasury Regulations also specifically state that a "reportable transaction" includes amounts paid or received in connection with the formation, dissolution, acquisition and disposition of a foreign owned domestic disregarded entity, including contributions to and distributions from the entity. A foreign owned domestic disregarded entity will also be required to satisfy certain record substantiation and retention requirements with respect to its reportable transactions.
We expect that new instructions for Form 5472 with guidance related to foreign owned domestic disregarded entities will be released soon.
Wiggin and Dana has experience with a wide variety of tax and other legal matters, including those relating to international transactions and tax compliance. Please do not hesitate to contact Peter Gruen or Jennifer Levine if you have any questions regarding the application of the Form 5472 reporting requirements to foreign owned domestic disregarded entities or other tax matters.