Important Change in U.S. Treatment of Foreign-Owned Limited Liability Companies (LLCs)
Read the PDF Version: 5472 Reporting for Foreign Owned LLC
New filing requirement for foreign-owned U.S. disregarded entities (DEs). On December 13, 2016, final regulations were issued under sections 6038A and 7701. Principally, these regulations treat a domestic disregarded entity (DE) wholly owned by a foreign person (foreign-owned U.S. DE) as a U.S. corporation solely for purposes of section 6038A.
UPDATE: Due to the enactment of the Tax Cuts and Jobs Act of 2017 on December 22, 2017, the penalty for failing for file Form 5472 has now been increased to $25,000 (from $10,000).
Effective January 1, 2017, Limited Liability Companies (LLCs) formed in any state of the United States or the District of Columbia, which are wholly owned by foreign persons and do not elect to be treated as corporations for tax purposes, will become subject to new IRS reporting requirements. New and existing LLCs will need to obtain an EIN after formation, and to do so will need to designate a Responsible Person. The LLC will need to maintain adequate books and records of transactions to track any payments or transfers of money, property or other reportable transactions between the disregarded entity and its sole member, whether such transactions are direct or indirect. These records must be available for inspection by the IRS upon demand.
What Does it Mean for Foreign-Owned Single-Member LLCs
In the words of the Internal Revenue Service, the new regulations “treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation separate from its owner for the limited purposes of the reporting, record maintenance and associated compliance requirements that apply to 25 percent foreign-owned domestic corporations under section 6038A of the Internal Revenue Code. The changes are intended to provide the IRS with improved access to information that it needs to satisfy its obligations under US tax treaties, tax information exchange agreements and similar international agreements, as well as to strengthen the enforcement of US tax laws.”
Disregarded Entities owned by a non-US resident that are in existence before January 1, 2017, will need to have an EIN. The disregarded entity will need to designate a responsible party to sign the application. If the responsible person is no longer associated with the LLC, then a new responsible party must be designated, and the IRS informed on the change. Only a duly empowered person should be designated as the Responsible Person, and if this person changes the IRS must be notified by following the “IRS How to update Information” link.
An LLC that existed before the new requirement may not have to file Form 5472 if it does not have any reportable transactions, but once such a transaction takes place, Form 5472 will need to be filed. The creation of a single-member LLC whose sole member is not a US person is itself a reportable transaction, and creates the requirement to file Form 5472 in the first year of existence.
After an LLC is dissolved/canceled/liquidated, it must file a final Form 5472, including any distribution of assets to its sole member. If the LLC changes status by electing to be treated as a corporation, or adding members and thereby becoming a partnership, it still must file a final Form 5472.
Contact Michael Kennedy today at firstname.lastname@example.org or 519-252-3888 to discuss this 5472 reporting issue, dealing with late filing penalties or setting up an LLC for yourself.
About Ingenuity Counsel & Michael Kennedy
Ingenuity Counsel, based in Windsor, Ontario, Canada, provides cross border tax & United States legal services to Canadians. Michael Kennedy, with 15 years of legal experience, and his team at Ingenuity Counsel Incorporated, assist companies and entrepreneurs with immigration, business, real estate and tax matters in the U.S. With his expertise, he is able to walk clients through the process of successfully setting up their business in the United States. Additionally, Ingenuity Counsel advises clients that own property in Florida, Michigan, Arizona & California with respect to income tax, estate planning & administration matters. Michael also handles wills & trusts, powers of attorney and probate administrations. Whether you have real property, financial accounts or business assets located in the United States, Michael and his team can help.
Michael is admitted to practice law in California & Michigan and permitted by the Law Society of Upper Canada to provide U.S. legal services in Ontario as a Foreign Legal Consultant. Prior to establishing Ingenuity Counsel in 2012, he practiced law in the United States for more than 10 years in California, Michigan and Florida. Michael has a U.S. law degree (JD) from Western New England University School of Law and his master of laws degree (LLM) from Georgetown University Law Center in Washington DC.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the U.S. Internal Revenue Service, we inform you that any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein.
The information contained herein is for informational purposes only, and cannot be relied upon as legal advice. Every person’s needs and situation are different that must be analyzed independently. After reading this article, if you feel you have, or a client has, U.S. estate or gift tax exposure or any other U.S. tax or legal issue, you should promptly consult with an experienced U.S. lawyer in order to examine the situation. Your reliance upon any information contained in this article will not create an attorney-client relationship with the author.
Copyright © 2018 Ingenuity Counsel Inc. All rights reserved.