January 03, 2017
New Reporting Requirements by Foreign-Owned U.S. Disregarded Entities
The IRS has recently issued final regulations regarding the treatment of U.S. disregarded entities wholly owned by foreign persons. These final regulations became effective December 13, 2016.
Prior to these regulations being issued, certain U.S. entities, such Limited Liability Companies (LLC's), that were not classified as corporations and were owned 100% by a foreign person were considered "disregarded entities," which meant that they were not treated as separate from their owners. These disregarded entities were not required to file an information return or a U.S. income tax return separately from their owners, unless they received U.S. source income or were engaged in a U.S. trade or business. This also meant that they were not required to maintain an Employer Identification Number (EIN).
According to the final regulations, U.S. disregarded entities that are owned 100% directly or indirectly by a foreign person will be treated as a domestic corporation for reporting and record-keeping purposes. (The regulations have no effect on the entity's classification for other purposes).
As a result of these new provisions, Single Member LLC's that meet the aforementioned criteria are now required to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, provided the entity had reportable transactions with its foreign owners or other foreign-related parties. In addition, such LLC's will need to maintain records for these reportable transactions with related parties.
This filing requirement is effective for tax years beginning on or after January 1, 2017. Revised Form 5472 instructions will be released in the near future.
Entities responsible for adhering to this new filing requirement will have to obtain an Employee Identification Number (EIN) by filing Form SS-4 with the IRS. (Taxpayers may also need to obtain an Individual Taxpayer Identification Number (ITIN) for the ultimate foreign owner).
The purpose of these regulations is to increase transparency of foreign persons having assets, liabilities, and income through ownership of U.S. disregarded entities. It will also promote U.S. compliance with international standards and encourage the exchange of tax information between U.S. and foreign countries.
Penalties may be assessed on any reporting corporation that fails to properly file Form 5472 when due and in the manner prescribed.
If you have questions about the new filing requirements pertaining to foreign disregarded entities, contact your Marcum international tax advisor.