A U.S. corporation with non-U.S. shareholders of 25% or more of stocks are generally required to file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.
What is Form 5472?
Form 5472 is a separate filing requirement from the U.S. entity’s obligation to file income tax returns. Attach this form to the reporting corporation’s federal income tax return. It requires certain information disclosures about the foreign shareholders and any transactions between it and those shareholders during the tax year. Foreign-owned domestic companies, including U.S. LLCs, that are disregarded as separate entities for federal tax purposes are subject to this new disclosure obligation. The new reporting requirement administered by the Internal Revenue Service (IRS) was due for the first time in early 2018
Form 5472 Filing.
The Form 5472 filing requirement applies to tax years of entities beginning on or after Jan. 1, 2017 and ending on or after Dec. 13, 2017. Most single-member U.S. LLCs will have to file their first Form 5472 for the year 2017 sometime in early 2018. The Form 5472 currently filed by U.S. corporations is submitted as part of their annual federal income tax return.
Single-member U.S. LLCs owned by foreign entities or individuals and have not elected to be treated as corporations for federal income tax purposes are subject to the reporting obligation. Other U.S. legal entities, such as limited and regular partnerships in certain instances might not file federal income tax forms and still be required to file Form 5472.
In an attempt to reduce the compliance burden, the regulations outline that the reporting entity is considered having the same tax year as its foreign owner if the foreign owner has a US income tax filing obligation. If the foreign owner does not have a filing obligation, then the entity must report on a calendar year basis.
Each of the foreign shareholders (entities or individuals) who own directly or indirectly at least 25% of the company’s property and has a reportable transaction with it must submit the form 5472 separately. The required information is Name, address and country of citizenship / incorporation, nature and the total of the reportable transaction with the shareholder, countries where the shareholder declares his taxes as a resident, and countries where he carries out economic activities.
With the IRS Form 5472 rules, the IRS prevents domestic disregarded entities (DDE), such as LLC, that are wholly owned by foreign natural or legal persons from benefiting from certain exemptions with the filing of Form 5472. DDE will be treated as national corporations, separate from their owner for reporting, record keeping, and other mandatory requirements. The new requirement is intended to provide the U.S. tax authorities with a clearer map to identify foreign LLC owners not currently in compliance with their U.S. tax obligations.
Form 5472 Filing Requirements.
If the owner of the disregarded entity is otherwise required to file a U.S. tax return, Form 5472 must be attached to the underlying income tax return. If no U.S. income tax return is required to be filed, Form 5472 should be attached to a pro forma Form 1120 that is completed by the foreign-owned US DE. It should include its name, address and Items B and E on Page 1 of the Form 1120 (EIN and information about whether the return is an initial return and if there has been a name or address change, respectively). In addition, “Foreign-Owned U.S. DE” must be written across the top of Form 1120. A foreign-owned US DE may not Efile its Form 5472. It must attach its Form (s) 5472 to the pro-forma Form 1120.
However, a disregarded entity that has been dormant for the entire year and with no reportable transactions is exempt from making a report on Form 5472. Other reporting and record-keeping requirements are - The disregarded entity must have an Employer Identification Number (EIN). A foreign-owned disregarded entity that is required to file Form 5472, must secure an EIN by filing Form SS-4 with the IRS. The EIN applicant must check the box “Other” for line 9a and write “Foreign-owned U.S. disregarded entity-Form 5472” as a reason for the application.
The disregarded entity may need to file an FBAR. A foreign-owned U.S. LLC may also need to file a Foreign Bank Account Report (FBAR). The FBAR reports certain bank and financial accounts maintained by the entity with a bank located outside the United States. The single-member LLC must keep proper records to support transactions. The IRS enforces strict record-keeping requirements on foreign-owned U.S. disregarded entities. The books and records requirement stands even if the entity has neither a U.S. source income nor a U.S. income tax return requirement.
Form 5472 Filing Deadline.
If the owner of the disregarded entity is otherwise required to file a U.S. tax return, Form 5472 must be attached and submitted by due dates, including extensions, of the underlying income tax return. If no U.S. income tax return is required to be filed, Form 5472 must be attached to a pro forma Form 1120 “U.S. Corporate Income Tax Return” and sent by due dates, including extensions, applicable to U.S. corporate income tax returns.
Penalties for failure to file information returns are separate from payments relating to underpayment of income taxes. Under certain circumstances, the penalties of failure to file information returns can be significantly greater than the U.S. income tax liabilities. Failure to maintain the proper records, failure to file the correct Form 5472, or failure to file a required Form 5472 may result in a $10,000 penalty for each failure per tax year. If a failure to file continues for more than 90 days after notification of a failure to file by the IRS, an additional $10,000 may apply for each 30-day period, or fraction thereof, that the failure continues. These fines cannot be appealed to the IRS. Thus, foreigners doing business in the U.S. are encouraged to ensure compliance with all U.S. tax and reporting obligations.
When filling out the IRS Form 5472, it must be taken into account that the US has signed many tax treaties and agreements to exchange tax information with other countries. This means if the foreign shareholder resides fiscally in a jurisdiction that complies with the FATCA (Foreign Account Tax Compliance Act) and reported revenues related to transactions made in the US territory, he might be exposed to fines and penalties if the statements do not match.
A foreign shareholder required to file and report transactions according to the IRS Forms 5472 rules that does not file it or has filed it incompletely, may incur a penalty of USD 10,000.00 per year. The Tax Cuts and Jobs Act increased the applicable penalty in Section 6038A(d)(1) from $10,000 to $25,000, effective for tax years beginning after December 31, 2017.
In addition to the failure to file penalty, a penalty can also be assessed for failure to maintain sufficient records. When warranted by the specific circumstances, criminal penalties may apply for filing a false or fraudulent information. Failure to file can make a company an IRS target causing possible audits and follow-ups the next years.
Form 5472 Filing Instructions.
Form 5472 can be difficult to interpret given the continued references to corporation. The instructions to the form should be consulted while completing the form.
Owners should be on the lookout for new Form 5472 instructions. If a reporting LLC does not already have one, it must obtain an EIN. The LLC will have to identify its “responsible party” (the individual who controls the disposition of the LLC’s funds and assets), which means that the responsible party will itself have to obtain its own U.S. identification number (for example, an ITIN). The LLC and its foreign owner will have to properly document 2017 reportable transactions and maintain sufficient records to substantiate the accuracy of the information return to be filed by the LLC and have implemented the appropriate internal procedures to ensure future compliance with the reporting requirement. These reportable transactions are listed in Part IV of the form.
Reportable transactions are listed in IRS Form 5472 Part IV. They are detailed in IRS Form 5472 instructions. A reportable transaction for IRS is the exchange of money or property with the foreign shareholder, such as payments for sales, rent, royalties, or interests. Reportable transactions include loans between the corporation and the foreign shareholders in both directions. In shareholder loans to the corporation, interest paid by the corporation may be tax deductible to the corporation, while, on the part of the shareholder, the interest charged may be subject to US taxation. With a withholding tax of a maximum of 30%, unless it meets the portfolio interest exemption, which must meet certain specific requirements (Form W8 BEN). If the interest rate applied to the loan is lower than the market rate (Applicable Federal Rate) or free of interest, the IRS may charge an appropriate interest rate.
The IRS will analyze the transaction according to its content to avoid disguised distributions of benefits, which are subject to a tax at a maximum of 30% and are not deductible. When filling out the IRS Form 5472, note that the US has signed many tax treaties and agreements to exchange tax information with other countries. If the foreign shareholder resides fiscally in a jurisdiction that complies with the FATCA (Foreign Account Tax Compliance Act) and has reported revenues related to transactions made in the US territory, he may be exposed to fines and penalties if the statements do not match. Foreign investors and their advisors should not forget about the new Form 5472 reporting obligation that will affect foreign-owned, single-member LLCs and other U.S. entities that are disregarded for U.S. federal income tax purposes.
The revised Instructions to Form 5472 note three changes to the form to reflect the changes made by the Final Regulations. In Part I, Line 3 is added to indicate that a foreign-owned US DE is filing Form 5472. In Part II, Lines 1-4, boxes are added to request a foreign taxpayer identifying number, if any, of a foreign owner of a foreign-owned US DE. A new Part V is added to identify certain reportable transactions of foreign-owned US DEs. This is used for the transactions that are not reported in Part IV and covers amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the entity, including contributions to and distributions from the foreign-owned US DEs. A short description of the transactions must be attached to Form 5472. Updates to forms and instructions should be closely monitored to ensure affected entities are not exposed to major penalties.