On December 13, 2016, the IRS published new regulations that treat foreign-owned U.S. disregarded entities (“FOUSDEs”) as domestic corporations for purposes of filing Form 5472 (and for certain record maintenance requirements). This new rule applies to taxable years beginning after December 31, 2016.
Form 5472 is required to be filed under Code §6038A and new Treas. Reg. §1.6038A-1(c)(1) provides in part:
A domestic business entity that is wholly owned by one foreign person and that is otherwise classified under § 301.7701–3(b)(1)(ii) of this chapter as disregarded as an entity separate from its owner is treated as an entity separate from its owner and classified as a domestic corporation for purposes of section 6038A. See § 301.7701–2(c)(2)(vi) of this chapter.
Under this new rule, a FOUSDE is treated as a domestic corporation for purposes of filing Form 5472.
As a cross reference, the entity classification rules have also been updated. New Treas. Reg. §301.7701-2(c)(2)(vi) provides in part:
An entity that is disregarded as an entity separate from its owner for any purpose under this section is treated as an entity separate from its owner and classified as a corporation for purposes of section 6038A if (1) The entity is a domestic entity; and (2) One foreign person has direct or indirect sole ownership of the entity.
An important component of the new regulations is an expansion of the types of transactions that must be reported by FOUSDEs. Normally, Form 5472 must include “reportable transactions” with related parties. Reportable transactions generally include transactions that affect taxable income of the reporting corporation and amounts loaned and borrowed. However, reportable transactions for FOUSDEs include equity related transactions, such as amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the entity, including contributions to and distributions from the entity. Treas. Reg. §1.6038A-2(b)(3)(xi). Essentially, any cash going into the FOUSDE by its owner and any cash coming out of the FOUSDE to its owner would need to be reported on the Form 5472.
For example, starting in 2017, when a foreign person sets up a new FOUSDE and contributes a nominal amount of capital into the FOUSDE, the contribution into the FOUSDE must be disclosed on Form 5472. The Form 5472 must be filed even if the FOUSDE does not otherwise need to file any U.S. tax returns. The penalty for failing to file Form 5472 when required is $10,000. Code §§6038A(d).
These new rules, combined with the $10,000 penalty, may be a wake up call for many foreign persons who operate (in the U.S. or outside the U.S.) through U.S. disregarded entities.
See also our flowchart on filing Form 5472 and our video on Form 5472.
