A U.S. limited liability company (LLC) that is owned 100% by one person is classified by default as a disregarded entity for U.S. federal tax purposes. A U.S. LLC that is a disregarded entity generally is not required to file a separate U.S. federal income tax return apart from its owner. The 100% owner of the U.S. LLC reports all of the LLC’s income earned and expense incurred on the owner’s U.S. federal tax return. As an exception to the general rule, the U.S. LLC may be required to file a separate U.S. federal income tax return if the 100% owner is a foreign person. The U.S. LLC will need to file a pro forma U.S. federal Form 1120 corporate income tax return with a U.S. federal form 5472 attached if the U.S. LLC has certain reportable transactions with U.S. and foreign related parties. This reporting requirement was effective beginning with the year 2017.
The U.S. federal Form 5472 is required to be filed by reporting corporations that have reportable transactions with U.S. and foreign related parties. For purposes of the Form 5472 reporting requirement, a reporting corporation includes a U.S. LLC that is owned 100% by a foreign person including a nonresident individual or a foreign company. Certain types of transactions are considered to be transactions that are reportable on the Form 5472. For U.S. LLCs, there is a broader scope of transactions that are reportable on the Form 5472. The IRS issued regulations under IRC section 6038A regarding the Form 5472 reporting requirement for foreign-owned U.S. disregarded entities. The language of the regulation refers to payments reportable on the Form 5472 including contributions to and distributions from the U.S. disregarded entity. The regulation under IRC section 6038A refers to such payments that are made in connection with the formation, acquisition, dissolution, and disposition of the entity. The regulation under I.R.C. section 6038A appears to limit the reportability of contributions and distributions to those that are made in connection with the specified transactions. However, the regulation under I.R.C. section 6038A also refers to a regulation under I.R.C. section 482 which defines certain transactions much more broadly. A foreign-owned U.S. disregarded entity must report the transactions identified under the I.R.C. section 482 regulation on the Form 5472. The reportable transactions under I.R.C. section 482 are not required to be in connection with the formation, acquisition, dissolution, and disposition of the entity. This means that a foreign-owned U.S. LLC must file a U.S. tax return and Form 5472 to report capital contributions received to fund operations and distributions of earnings from the U.S. LLC’s ordinary trade or business activity.
The pro forma U.S. federal Form 1120 and Form 5472 reporting requirements should not be overlooked. There is a $25,000 USD penalty for the failure to file the U.S. federal Form 5472 per filer per related party per year. A separate Form 5472 is required with respect to reportable transactions with each different U.S. and foreign related party. There is also a Form 5472 continuation penalty. The continuation penalty imposes an additional $25,000 penalty for the failure to file the Form 5472 for each 30-day period that the delinquency continues after the IRS sends a notice. Additionally, the foreign owner of the U.S. disregarded entity also may be required to file a U.S. federal income tax return to report the income earned from the U.S. disregarded entity.
Aronson’s U.S. international tax services team works with many foreign owners of U.S. LLCs to comply with the pro forma U.S. federal Form 1120 and Form 5472 filing requirement. For more information regarding U.S. international tax reporting and compliance requirements applicable to foreign-owned U.S. LLCs, please contact Alison Dougherty at 301.222.8262.