The Internal Revenue Service and Department of the Treasury recently finalized regulations that create additional reporting requirements for foreign-owned entities in the United States.
Specifically, the new rules require domestic disregarded entities wholly owned by a foreign individual (single-member LLCs) to annually identify its beneficial owner to the IRS in a Form 5472 filing. The rules are a significant departure from previous IRS practice, which treated a single-member LLC as an entity disregarded as separate from its owner for reporting purposes. In effect, such entities are now subject to the same reporting, record maintenance and other related compliance requirements as those covering 25% foreign-owned domestic corporations under section 6038A of the Internal Revenue Code.
These added requirements are the latest in a line of federal efforts to enhance disclosure by foreign investors. For example, the Financial Crimes Enforcement Network (FinCEN) recently issued a series of Geographic Targeting Orders focused on identifying those using foreign entities and all-cash transactions to purchase luxury real estate in popular markets, including Miami and New York City – transactions that come with a higher risk of being vulnerable to money laundering activities. FinCEN also imposed rules requiring U.S. financial firms to identify anyone owning a 25% or greater stake in an entity with a U.S. bank account.
The Form 5472 regulations were initially proposed in May and became effective Dec. 13, 2016. The IRS received no written comments on the proposed regulations and no public hearing was requested or held on the matter. However, despite the lack of objections, some changes were made from the original proposal. For example, it was clarified that the final rules apply without regard to certain reporting exceptions listed under §1.6038A-2(e)(3) and (4), which were revised accordingly.
Also, the IRS and Treasury said entities filing Form 5472 would follow the same calendar year as their foreign owner if that owner has U.S. return filing obligations. If the foreign owner does not have U.S. return filing obligations, entities can make the taxable year the same as the calendar year “unless otherwise provided in forms, instructions, or published guidance.” Finally, whereas the original proposal would have applied to tax years ending on or after Dec. 13, 2017, the final regulations apply to taxable years of entities beginning on or after Jan. 1, 2017 and ending on or after Dec. 13, 2017.
Taken within the broader context of added scrutiny of foreign ownership and investment, the new Form 5472 regulations demonstrate the ongoing interest in such activities from U.S. regulators. Covered individuals and firms should assess their activities to ensure compliance with these updated reporting requirements.