On December 13, 2016, the IRS issued final regulations requiring domestic disregarded entities that are fully owned, either directly or indirectly, by a foreign person, to be treated as a domestic corporation to comply with Internal Revenue Code Section 6038A. The final regulations generally require foreign-owned LLCs to do the following:
- File Form 5472;
- Maintain records to prove the accuracy of Form 5472; and
- Obtain an employer identification number (EIN) to report on Form 5472
As provided in the entity classification regulations, disregarded entities are eligible business entities with only one owner and not recognized for tax purposes as an entity separate from its owner (i.e. single member LLC).
A foreign person is defined as “any person who is not a United States person.” A foreign person includes individuals who are not residents or citizens of the United States, as well as a partnership, association, company, or corporation that is not created or organized in the United States. Likewise, any foreign estate or foreign trust described in section 7701(a)(31) is also a foreign person. Furthermore, a foreign person will be considered to wholly own a disregarded entity if the foreign person has direct or indirect sole ownership of the entity. The regulations do not affect the entity’s classification for other purposes.
The purpose of Form 5472 and these new regulations is to prevent foreigners from evading U.S. taxes and to close some loopholes that existed in the tax code.
Companies required to file such reports are liable for penalties of at least $10,000 for each Form 5472 that is not timely filed or is filed inaccurately or for failure to maintain the required records; penalties may increase significantly in the case of continued failures.
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