Starting with tax year 2017, certain reporting requirements have changed for filing Form 5472. Form 5472 is an information return for a US Corporation engaged in a US trade or business with foreign ownership of more than 25%. Information is required to be provided under sections 6038A and 6038C of the Internal Revenue Code. (IRC) This report must be filed in the event of a reportable transaction occurring between the said corporation and its foreign related party. We will now look at the exact definitions of a reporting corporation, related party as well as reportable transaction. This blog will also detail the requirements of filing for a disregarded entity owned by a non-resident alien.
In this instance a reporting corporation is one which is either-
- Foreign owned 25% including a foreign owned disregarded entity or
- Foreign corporation engaged in trade or doing business in USA
25% shareholding refers to at least 25% of total voting power or total value of stock. In both cases we are referring to all classes of stock. Without going into the complexities of constructive ownership, suffice it to say, that the constructive ownership rules will apply in the above definition subject to certain modifications.
In its simplest form, a related party refers to any 25% shareholder of the corporation. The 25% threshold may be met directly or indirectly. Now, coming to a reportable transaction, it refers to any transaction such as sales, rent etc where monetary consideration was the only consideration paid or received. It also includes a transaction or a group of transactions where consideration paid or received is partly in kind or non-monetary or where the said consideration is less than the actual full value.
Additionally, based on the latest changes we must also consider foreign owned DE – that is foreign owned disregarded entity. A foreign owned DE is technically a Sch C on a Form 1040 NR. To define it in terms of the IRC, it “is an entity that that is disregarded as an entity separate from its owner”. Prior to 2018, only a US corporation with at least a 25% owner had a Form 5472 filing requirement. However, now, LLCs are also part of this rule. Basically this means that if the LLC has any transactions at all with the foreign owner, it would be a reportable transaction. This is so because of the broad based definition of a reportable transaction. A transfer of funds from the foreign owner to the LLC’s bank account would be a reportable transaction.
Vice versa would also be a reportable transaction. Considering that the penalty for non-filing of Form 5472 is $25,000, it would be better to err on the side of caution and file the form even for a dormant LLC. Either cash basis or accrual basis may be used for reporting the transaction depending upon the accounting method used by the reporting corporation.
The reporting corporation has the responsibility of maintaining records that will help determine the correct treatment/nature of transactions between the corporation/LLC and the foreign owner. Under the final regulations, a foreign owned DE will need to file a proforma Form 1120 with the Form 5472 attached. This filing will have the same tax year as the foreign owner. These forms would need to be filed with the Ogden, Utah office of the IRS and this is a special mailing address for foreign owned DEs.
The Form 5472 is merely a reporting requirement under the revenue code and IRS rulings. However, based on FATCA, one may assume that in the near future this information could also be potentially shared with other counties. This could also lead to reporting requirements across multiple tax jurisdictions and the attendant complexities of compliance. Many countries are signatories to the FATCA compliance of the US government and it would not be presumptuous to assume that the US government may not be averse to sharing this information with other tax jurisdictions in a bid to obtain continued cooperation from them on reports about its citizens.
