March 16, 2018
Updated March 11, 2020
New Form 5472 Filing Requirement for Foreign Owners of Certain US LLCs
Our January 25, 2017, International Tax Alert "New Rule for Foreign Owners of US LLCs" discussed the final regulations released under Code §6038A that treat certain 100% foreign-owned domestic (US) "disregarded entities" as domestic corporations.
Reg. §301.7701-2(c)(2)(vi)(A) enacted in December 2016 is now in effect for tax years beginning after December 31, 2016 and ending on or after December 13, 2017, and imposes a new US international tax reporting requirement for these entities.
Which Disregarded Entities Are Considered Domestic Corporations Under the New Regulation?
A US Limited Liability Company (LLC) is classified as a disregarded entity if it has one owner and has not made an election to be taxed as a corporation. Such LLCs that are wholly owned by a foreign (non-US) individual or entity, directly, or indirectly through one or more other disregarded entities are considered domestic corporations subject to the new reporting requirement. If the LLC is owned by a US C corporation, it is generally not subject to this rule.
US INTERNATIONAL TAX REPORTING REQUIREMENT
"Pro-Forma" Corporate Tax Return and Form 5472
Pursuant to Code §6038A, any LLC affected by the above rule is required to timely file Form 5472 in a year it has "reportable transactions", even if it is not otherwise required to file a US tax return. To satisfy the requirements of the new regulation, the LLC is required to file a pro-forma Form 1120 "US Corporate Income Tax Return" to transmit Form 5472 to the IRS. Failure to timely comply could result in a penalty of US $25,000 or more for each noncompliance. A separate Form 5472 must be filed for each related party the LLC has reportable transactions with.
For a calendar year LLC, the corporate tax return along with Form 5472 is due April 15, 2018. A 6-month extension of time to file the return is available and an extension request must be submitted by the due date of the return. In order to file an extension (and the corporate tax return), the LLC must have a US tax ID - an Employer Identification Number (EIN). If the LLC does not have an EIN, an application must be submitted as soon as possible to obtain one. In situations where the non-US owner does not have a US tax ID, obtaining one could potentially take longer than 2 weeks.
Reportable Transactions
Among other transactions, a reportable transaction includes the following transactions with a related party: rental income, sales transactions, remuneration or commission payments, amounts loaned or borrowed, and transactions at less than fair market value (such as, personal use of property).
In addition, Form 5472 was revised in December 2017 to add a new Part V "Reportable Transactions of a Reporting Corporation That is a Foreign-Owned U.S. DE". As a result of this revision, the definition of a reportable transaction now also includes (pursuant to Reg. §1.482-1(i)(7)), amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the LLC including contributions to and distributions from the LLC.
Please feel free to contact us to determine how the foregoing affects your entity.
To receive our free International Tax Alerts via e-mail, please click here to subscribe.
