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New Filing Obligations for Foreign-Owned Domestic Disregarded Entities

Michael Eagan, J.D., LL.M. 01.03.2018 | Client Alert

In December 2016, the Internal Revenue Service and the US Treasury Department issued final regulations subjecting non-US owned disregarded entities to US filing and other requirements. These obligations apply for the 2017 taxable year.  A client alert was prepared on this topic in January, 2017.

The Basics

Disregarded entities are generally not recognized for US tax purposes and are typically not subject to US federal tax filing and reporting requirements.  Under the new regulations, however, foreign-owned US disregarded entities are, for certain reporting purposes, treated as separate from their owners, subjecting them to certain reporting requirements currently applicable to 25% foreign-owned US corporations.

New Filing & Reporting Obligations

The Final Regulations require all foreign-owned domestic disregarded entities to:

  • File Form 5472 – Foreign-owned domestic disregarded entities need to file a Form 5472, Information Return of 25% Foreign-Owned US Corporation of a Foreign Corporation Engaged in a US Trade or Business, for each related party with which the entity had any reportable transactions.  Reportable transactions include, but are not limited to, transactions in which the reporting entity pays or receives monetary consideration as well as non-monetary consideration (or that are less than full consideration) in connection with the formation, dissolution, acquisition or disposition of the reporting entity, as well as contributions and distributions to and from the reporting entity, etc.
  • Obtain an EIN – An Employer Identification Number must be acquired by filing Form SS-4 (which includes disclosure of the entity’s responsible person (which must be an individual) and the responsible person’s individual tax identification number (ITIN)).  The responsible person is, in the case of an LLC, the individual that owns or controls the entity or that exercises effective ultimate control over the entity and in the case of a grantor trust, the grantor, owner or trustor.
  • Maintain Adequate Records – Reporting entities must maintain records sufficient to establish the correctness of the entity’s Form 5472, including information, documents, or records relevant to determine the proper US tax treatment of certain transactions between the reporting entity and certain related parties.

The Penalty

The final regulations provide for a penalty of $10,000 to be assessed to any reporting corporation that has failed to file a Form 5472, or has filed a substantially incomplete Form 5472.  A penalty of $10,000 is also applied for a failure to maintain the necessary records.  Additionally, every foreign or domestic related party with which the reporting corporation had a reportable transaction during the taxable year, is considered separate, therefore is subject to a penalty of $10,000 each for failure to file or maintain records.

Again, these regulations are applicable to 2017.  If you have questions about the final regulation requirements and how they will be applied, please contact:

Michael Eagan 212.331.8831 | meagan@berdonllp.com

Marc Ausfresser 212.331.7639 | mausfresser@berdonllp.com

Or contact your Berdon advisor

Berdon LLP New York Accountants

 

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