Brace Up! Foreign Owners of Single-Member US LLCS – New IRS Filing Requirement 5472
On Dec. 12, 2016, the IRS released final regulations under sections 6038A and 7701 that would for the first time require foreign-owned U.S. disregarded entities (DREs), such as a single-member LLC owned by a foreign person or Corporation, to obtain an employer identification number and file an information return with the IRS.
The IRS has justified this proposed requirement by citing its obligations to exchange information with its treaty partners, which would presumably include information on U.S. LLCs owned by persons or entities in treaty partner jurisdictions.
This filing requirement will be Effective for the 2017 tax year, Limited Liability Companies (LLCs) formed in any state of the United States or the District of Columbia, which are wholly owned by a foreign person and do not elect to be treated as corporations for tax purposes, will become subject to new reporting requirements.
New and existing LLCs will need to obtain an EIN after formation, and to do so will need to designate a Responsible Person. The LLC will need to maintain adequate books and records of transactions to track any payments or transfers of money, property or other reportable transactions between the disregarded entity and its sole member, whether such transactions are direct or indirect. These records must be available for inspection by the IRS upon demand.Why the change?
Under the “check-the-box” regulations, a business entity with a single owner can be disregarded as separate from its owner for various tax purposes and may not be required to file a U.S. tax return or obtain an EIN. As a result, the IRS may lack information about the disregarded entity potentially shielding foreign owners from U.S. and foreign tax liabilities. Many U.S. LLCs are viewed as tax havens by foreign jurisdictions.What type of LLCs are required to file form 5472?✓ an LLC with a single non-US owner, which may be a foreign individual, company, partnership or non-grantor trust;
✓ an LLC owned by another LLC which is owned by a single non-US owner, in which case both LLCs may have a filing requirement;
✓ an LLC owned by a grantor trust (whether domestic or foreign), the grantor of which is foreign;
✓ an LLC owned by a non-US company that has made an election to be disregarded for US income tax purposes and is owned by a single non-US individual, company, partnership or trust.Are LLCs with 2 or more foreign partners required to file form 5472?
An LLC that has more than one owner, foreign or otherwise, is not covered by the new regulations. However, if the multi-member LLC has not made an election to be taxed as a corporation, it is classified as a partnership for US income tax purposes. An LLC taxed as a partnership is required to file Form 1065 (US Return of Partnership Income) annually with the IRS, unless the LLC neither receives income nor incurs any expenditures treated as deductions or credits for federal income tax purposes.What type of information is the IRS requesting on form 5472?
A revised Form 5472 has not yet been released, but the foreign-owned single-member LLC will likely be required to✓ report identifying information for the LLC and its single owner, including: the name, address and tax identification number, if any, of its non-US owner;
✓ each country in which the owner is tax resident;
✓ places where the owner conducts its business; and
✓ the country or countries of organization, citizenship or incorporation of the owner.In addition, the LLC Disregarded entities will be required to report all transactions with foreign-related parties. The term “transaction” is defined to include 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.Are there any penalties for not filing 5472 ?
The penalty provisions associated with failure to file the Form 5472 and failure to maintain records would apply to this situation ($25,000 per year).Does your firm assist with 5472 filing?
Yes! If you have questions about the new filing requirements pertaining to foreign disregarded entities or LLCs, contact us for further clarification.
***Disclaimer: I am a tax accountant and a CPA licensed in Massachusetts , but I am not your accountant or advocate (Unless you have signed up to my services). This communication is not intended as tax advice, and no tax accountant -client relationship results**