On December 13, 2016, the IRS issued new regulations (T.D. 9796) that requires U.S. disregarded entities owned by a foreign person to file the U.S. Federal Form 5472. The new Form 5472 filing requirement applies for tax years beginning after December 31, 2016, and ending on or after December 13, 2017.
The Form 5472 is required to be filed by a reporting corporation that engages in reportable transactions with a U.S. or foreign related party. For purposes of the Form 5472 filing requirement, a reporting corporation is either a U.S. C corporation owned directly or indirectly by a 25% foreign shareholder or a foreign corporation engaged in a U.S. trade or business. The new regulations require a reporting corporation for the Form 5472 to include a U.S. disregarded entity that is owned directly or indirectly by one foreign person. A U.S. disregarded entity is a company or a grantor trust that is 100% owned by one person who is treated as the owner of all assets, liabilities, and income of the entity. A U.S. disregarded entity is considered to be owned indirectly by a foreign person if it is owned through one or more other disregarded entities or grantor trusts. The new regulations also expand the scope of reportable transactions to include the foreign owner’s capital contributions to a U.S. disregarded entity and distributions from a U.S. disregarded entity to its foreign owner.
The IRS updated the 2017 U.S. Federal Form 5472 and the filing instructions in December 2017 to include the revisions for the new reporting requirement. The new Form 5472 filing instructions say that a foreign-owned U.S. disregarded entity that has a reportable transaction with a related party is now required to file a pro forma U.S. Federal Form 1120 corporate income tax return with the Form 5472 attached. The only information that the U.S. disregarded entity is required to complete on the Form 1120 is the name, address, FEIN, whether the return is initial, final, or if there is an address or name change. The heading “Foreign-Owned U.S. DE” should be reflected at the top of the first page of the Form 1120. The updated Form 5472 reflects a checkbox on the first page to indicate that the reporting corporation is a foreign-owned U.S. disregarded entity. The second page of the Form 5472, Part V, requires the reportable transactions of the foreign-owned U.S. disregarded entity to be reported on a separate statement attached to the Form 5472.
In order to file the Form 5472 as a reporting corporation, the U.S. disregarded entity is required to obtain a U.S. FEIN as a taxpayer identification number. When applying for the FEIN for the U.S. disregarded entity on the U.S. Federal Form SS-4, it is necessary to provide the name and U.S. FEIN, SSN, or individual taxpayer identification number (ITIN) of the foreign owner as the responsible party. This will require a foreign nonresident individual owner of a U.S. disregarded entity to apply for an ITIN on the U.S. Federal Form W-7. There are certain procedures that a nonresident individual must follow to file the Form W-7 ITIN application and the processing time for the application with the IRS can take several months.
The new regulations also exclude a U.S. disregarded entity with a foreign owner from certain regulatory exceptions to the Form 5472 recordkeeping requirements. Those exceptions typically exempt small corporations from the recordkeeping requirements if the corporation has less than $10 million in gross receipts and $5 million or less of reportable related party transactions that are less than 10% of gross income. A U.S. disregarded entity with a foreign owner is not eligible for such exceptions.
The Form 5472 is an important U.S. international tax reporting requirement that should not be missed. Failure to file, late filing, or a substantially incomplete filing of the Form 5472 can result in a $10,000 USD penalty per related party, per year.
For more information, please contact our international tax advisor at 301.231.6200.