New regulations, finalized this year, will require foreign-owned disregarded entities to file Form 5472, effective for tax years starting on or after January 1, 2017 and ending on or after December 13, 2017. The purpose of Form 5472 is to disclose foreign owners and certain related party transactions during the tax year in which the reportable transactions occurred.
While these entities will still be disregarded for most federal tax purposes, the new requirements are designed to make it harder for foreign investors to use US shell companies to evade taxes and hide assets from their home countries.
The final regulations issued by the Treasury Department and Internal Revenue Service stipulate that domestic disregarded entities wholly owned (directly or indirectly) by a foreign person(s) must now:
- File Form 5472 if there is a reportable transaction. The regulations also expand the class of reportable transactions that trigger the need for Form 5472.
- Obtain an employer identification number (EIN) for use on the Form 5472. To request an EIN, the entity must file Form SS-4.
- Identify a “responsible party” for the entity (required to file Form SS-4 and obtain an EIN). An example would be an owner or manager of a Limited Liability Company.
- Keep permanent books and records to establish US tax treatment of transactions with related parties. These entities may no longer take advantage of small corporation exceptions to record maintenance requirements.
What this means for you
These reporting requirements effectively treat foreign-owned disregarded entities as corporations (separate from their owners) for tax-filing and record-keeping purposes. The regulations also exclude these entities from certain Form 5472 exceptions that are available to US corporations. Penalties start at $10,000 for non-compliance, so consult with your tax advisor as soon as possible to determine your reporting obligations under these new regulations.
Compliments of Marks Paneth LLP, a member of the EACCNY