Global companies with a disregarded entity in the US face new regulations
Expanded IRS tax regulations now apply to a larger number of foreign corporations and include bookkeeping requirements. There are stiff penalties for non-compliance.
If your international company has a domestic disregarded entity (DRE) in the US, you may need to file IRS Form 5472 going forward. Failure to comply could result in a fine of US$10,000, suspension of the statute of limitations on your entire tax return for the year at issue, and possibly even criminal penalties.
The US Treasury and IRS issued final regulations in December 2016 under IRC Section 6038A. These expand the category of ‘reporting corporations’ subject to Form 5472 reporting and record maintenance requirements to include all foreign-owned domestic DREs. Previously, a reporting corporation was a 25% foreign-owned US corporation or a foreign corporation engaged in US trade or business that entered into reportable transactions, i.e.transactions that impact the computation of taxable income. Those most likely affected by the new regulations include:
- Foreign corporations that hold their US branch operations in a domestic DRE
- Foreign corporations and individuals that hold passive-type assets (e.g. stock in a foreign subsidiary, foreignissued corporate bonds, etc.) through a domestic DRE
- US corporations and individuals that hold domestic DREs through controlled foreign corporations (CFC)
The new regulations treat your foreign-owned domestic DRE as a reporting corporation for the limited purpose of reporting related-party transactions on Form 5472. They also require the DRE to maintain a permanent set of books and records that establish the correctness of the information reported on the form.
It is worth noting that under the old Form 5472 reporting regulations, a foreign owner would report relatedparty transactions of its domestic DRE only if the DRE conducted a US trade or business, i.e. the US DRE had to be a branch. The new regulations represent a significant departure from prior rules. Essentially all related-party transactions involving a foreign-owned domestic DRE must now be reported on Form 5472, including transactions affecting the computation of taxable income and capital-related transactions. These transactions include capital contributions, entity liquidations, and distributions of cash and property.
In addition, Form 5472 should be filed by a domestic DRE even in cases where the DRE is owned by a CFC and the CFC’s US shareholder reports its ownership interest in the foreign corporation using Form 5471.
The new filing requirements apply to taxable years of foreign-owned domestic DREs beginning on or after 1 January 2017, and ending on or after 13 December 2017.
For more information, contact:
T: +1 704 816 8449