New Filing Requirements For Foreign Owned US Disregarded Entities
As the taxation and filing requirements of foreign owned entities continues to evolve it is important to be aware of a new filing requirement for U.S. disregarded entities for tax years beginning on or after January 1, 2017. A U.S. disregarded entity is a business entity with one owner that is not recognized for tax purposes as an entity separate from its owner. The Treasury Department has issued final regulations regarding the treatment of certain foreign-owned U.S. disregarded entities for information reporting purposes. Failure to comply with the new regulations and filing requirements may result in a $10,000 dollar penalty for each violation for each year. The new regulations will only be applicable if you are a non-U.S. individual, or non-U.S. entity, that owns a U.S. disregarded entity either directly or indirectly. If neither of these scenarios applies to you then the new filing requirements do not apply to you.
Summary of Form 5472 “Information Return of a 25% Foreign Owned U.S. Corporation or a Foreign Corporation engaged in a U.S. Trade or Business”
The Internal Revenue Code regulations require Form 5472 to be filed for each U.S. disregarded entity that has the following types of transactions:
- Sales and purchases of stock in trade (inventory)
- Sales and purchases of tangible property other than stock in trade
- Rents and royalties paid and received (other than intangible rights)
- Sales, purchases, and royalties paid and received for intangible property rights;
- Consideration paid and received for technical, managerial, engineering, construction, scientific, or other services
- Commissions paid and received
- Amounts loaned and borrowed
- Interest paid and received
- Insurance and reinsurance premiums paid and received
- Amounts paid and received not previously taken into account to the extent that such amounts are taken into account in determining taxable income
- Any transaction in connection with the formation, dissolution, acquisition, and disposition of the entity, including contributions to and distributions from the entity
In previous years these transactions could be reported on the Form 5472 of a U.S. disregarded entity’s parent company. The U.S. disregarded entity’s parent company is required to report transactions with a 25% or greater direct or indirect shareholder. The new regulations provide that the transactions of a U.S. disregarded entity should be reported and filed separately from the parent company. As a result, the U.S. disregarded entity must obtain an employer identification number from the IRS (if it has not already done so) to properly file the Form 5472.
In general, the Form 5472 must be filed on the 15th day of the fourth month following the disregarded entities fiscal year end date. This filing can be extended six months if necessary. Failure to file a timely Form 5472 will result in a $10,000 penalty from the Internal Revenue Service.
For questions, additional information or assistance with preparing these filings, please contact our office and speak with one of our professionals.