Changes to Reporting Requirements of Foreign-Owned US Disregarded Entities

On December 13, 2016, the United States Treasury Department (Treasury) and the Internal Revenue Service (IRS) issued final regulations that created new reporting requirements for domestic (i.e. U.S.) disregarded entities, wholly owned by foreign persons (for example,  Canadian persons) to be subject to similar requirements faced by 25% foreign-owned domestic corporations pursuant to Internal Revenue Code Section 6038A.

Reason for Change

Per US law, a business entity, such as a Limited Liability Company (LLC), with a single owner, can be treated as disregarded for federal and some state tax purposes and may therefore not be required to file a U.S. federal tax return or be required to obtain a US tax identification number (i.e. EIN).  As a result, the IRS lacked the ability to identify the possibility of income being shielded or sheltered by foreign persons not just from the U.S. authorities but also from foreign   taxation authorities.

These new regulations will provide the IRS and Treasury with information about these entities that owners were previously not obligated to report.  The intention is to create increased transparency which is expected to help identify income that may be subject to taxation as well as raise U.S. compliance to match increased international standards.  It will also strengthen the ability to enforce existing U.S. tax laws.

New filing Requirements

As stated above, similar to domestic U.S. corporations, partnerships or foreign corporations engaged in a U.S. trade or business with a 25% or greater foreign ownership, these disregarded entities are now required to file specific information with regard to monetary transactions with related parties.  At a high level, the additional compliance would be as follows:

• Each applicable entity will be required to obtain an EIN by completing U.S. Federal Form SS-4.
• Upon obtaining an SS-4, each applicable entity will be required to annually file a U.S. Federal Form 5472 for each entity with which it has reportable related-party transactions.

Timing and Implications

These changes will take effect for applicable entities’ tax years beginning on or after January 1, 2017.  Accordingly, the first due dates for filing these forms will be March/April 2018.  Taxpayers should ensure that they are prepared for these new filing requirements because the IRS may impose penalties of US$10,000 for each Form 5472 they consider as not timely filed.

Should you require any assistance with respect to these important changes, please contact your Crowe BGK advisor.

About the Author:

Paul Garellek, CPA (Illinois), is a Senior Manager in U.S. Tax Services, at Crowe BGK.

Connect with him: [email protected]