Final Regulations Issued Regarding Foreign-Owned U.S. LLCs and Reporting Requirements
December 20, 2016
By Harold Adrion
On December 13, 2016, the IRS issued final regulations that treat a domestic disregarded entity wholly-owned by a foreign person or entity as a domestic corporation for reporting, recordkeeping, and compliance requirements that apply to 25% foreign-owned domestic corporations under IRC Sec. 6038A. The foreign-owned disregarded entity will be required to file 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”).
Under the “check-the-box” regulations, a business entity with a single owner can be disregarded as separate from its owner for various tax purposes and may not be required to file a U.S. income tax return or obtain an employer identification number (“EIN”).
A number of non-residents have used U.S. LLCs to hold U.S. real estate and foreign stocks and other foreign assets. This has resulted in a number of complaints from international organizations putting pressure on the U.S. to disclose information about the ultimate owner of U.S. LLCs.
The Financial Action Task Force and the Organization for Economic Co-operation and Development’s Global Forum on Transparency and Exchange of Information for Tax Purposes have noted that this lack of information about disregarded entities hinders U.S. law enforcement efforts and makes U.S. compliance with international tax transparency and information exchange standards difficult.
Proposed regulations were issued on May 6, 2016 which would amend Treas. Reg. Sec. 301.7701-2 to treat a domestic disregarded entity wholly-owned by a foreign person as a domestic corporation for purposes of the reporting and recordkeeping requirements of IRC Sec. 6038A. The final regulations adopt and expand on the proposed regulations and change the effective date.
Similar to that contained in proposed regulations, the exceptions to the record maintenance requirements for small corporations in Treas. Reg. Sec. 1.6038A-1(h) (i.e., for reporting corporations that have less than $10 million in U.S. gross receipts for a tax year) and for de minimis transactions in Treas. Reg. Sec. 1.6038A-1(i) (i.e., for any tax year in which the aggregate value of gross payments that the reporting corporation makes to and receives from foreign related parties with respect to related party transactions is not more than $5 million and is less than 10% of its U.S. gross income) do not apply to these entities in the final regulations.
The proposed regulations did not address the exception provided in Treas. Reg. Sec. 1.6038A-2(e)(3), under which a reporting corporation is not required to file Form 5472 with respect to a related foreign corporation when a U.S. person that controls the related foreign corporation files a Form 5471 (“Information Return of U.S. Persons With Respect to Certain Foreign Corporations”) containing required information with respect to reportable transactions between the reporting corporation and the related foreign corporation for the tax year. Similarly, the proposed regulations did not address the exception provided in Treas. Reg. Sec. 1.6038A-2(e)(4), under which a reporting corporation is not required to file Form 5472 with respect to a related foreign corporation that qualifies as a foreign sales corporation for a tax year for which the foreign sales corporation files Form 1120-FSC (“U.S. Income Tax Return of a Foreign Sales Corporation”).
The final regulations provide that for the entities covered by the regulations, the exceptions under Treas. Reg. Sec. 1.6038A-2(e)(3) and Treas. Reg. Sec. 1.6038A-2(e)(4) do not apply.
The proposed regulations had provided that regulations would be applicable for tax years ending on or after the date that is 12 months after the date the regulations were published as final regulations. However, the final regulations provide that they apply to tax years of entities beginning on or after January 1, 2017, and ending on or after December 13, 2017.
Both U.S. and non-U.S. tax advisors should review structures to determine if U.S. LLCs are in place. Particularly where U.S. tax advisors have not been involved, many structures exist that include a U.S. LLC interposed between a non-resident owner and a foreign corporation or asset.