New Form 5472 requirements for foreign-owned disregarded entities

Your Guide to State, Local, Federal, Estate + International Taxation

Form 5472, international tax, global business, foreign tax, IRSUnder the proposed Internal Revenue Code Section 6038A regulations issued on May 6, 2016, U.S. disregarded entities owned by foreign persons would be treated as domestic corporations for purposes of filing 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 new regulations are intended to help the IRS gather more information with respect to international information exchange agreements, tax reporting and enforcement of tax laws. This filing requirement is particularly onerous to some, as the requirement to file will not be obvious to foreign persons merely holding an asset such as land. For example, a foreign entity may be required to file Form 5472 (attached to Form 1120-F) in years in which there was a contribution of funds.

In the past, some foreign-owned disregarded entities had no tax filing requirements and no need to obtain an EIN. Under these proposed regulations, foreign-owned disregarded entities would need to file Form 5472 to disclose any reportable related party transactions. Reportable related party transactions may include transactions such as loans, fees, contributions or any other reportable transactions between the entity and its owner or other related parties. Since an EIN is needed to file Form 5472, the entity would also need to obtain an EIN if it did not already have one.

Once the proposed regulations are finalized, they would apply to the tax year ending twelve months after the date the regulations are published as final. Penalties for non-filing of Form 5472 are very high, at $10,000 per form not filed timely or for failure to maintain appropriate records. Therefore, it is important to consult a qualified tax professional for compliance needs.

Jill A. Helm, CPA