Heightened reporting requirement for foreign-owned domestic disregarded entities

In early December 2016 the US Treasury Department released final regulations with respect to the treatment and reporting obligations of foreign-owned US domestic disregarded entities, ie single-member limited liability companies ('LLCs').  The effect of the regulations is to treat such an LLC as a domestic corporation for the purposes of Internal Revenue Code Section 6038A, thereby ensuring that certain transactions are reported on IRS Form 5472 (Information Return of a 25% Foreign-owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business).  The transactions to be reported are broadly all transactions between the LLC's owner and the LLC including contributions to and distributions from the LLC, and the borrowing and lending of funds (and the associated interest paid or earned) to or from the LLC.  Also to be reported are transactions between the LLC and 'foreign related parties' to include any direct or indirect 25% shareholders of the LLC's owner, any family members of such a 25% owner, members of a controlled group of companies one of which is the owner, and, if the owner is a trust, the trust's beneficiaries and trustees and other beneficiaries.  

The effect of the regulations is to extend reporting to entities that would otherwise have no reporting obligation for IRS Form 5472 purposes.  For instance, in the past a foreign-owned domestic disregarded LLC would not have had a reporting obligation if its sole income was not US source income or not gross income such as portfolio interest.  However, by treating the entity as a corporation for these purposes, the regulations require the entity to keep accounts pursuant to Section 6038A and to disclose the transactions described above on IRS Form 5472 regardless of the source of the LLC's income.   

The new regulations apply to transactions from and after 1 January 2017.  

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Client types: Professional advisors