On 13 December 2016, the Department of Treasury and Internal Revenue Service (“IRS”) issued final regulations creating reporting and record keeping requirements for US disregarded entities owned by non-US person.
A disregarded entity is any entity with a single owner and is disregarded from its owner for US tax purposes. The IRS realized that US disregarded entities owned by foreign persons who did not have any US source income may never have to file US tax returns or otherwise disclose ownership information to the US government. To correct this, the final regulations treat US disregarded entities as domestic corporations solely for purposes of Section 6038A of the Internal Revenue Code. Section 6038A requires entities to comply with additional record keeping and reporting requirements. In particular, under Section 6038A a Form 5472 must be filed if there are any 25% or greater non-US shareholders. Under the final regulations even if a US disregarded entity has no US income to report, it must file a Form 5472 and report its 25% or greater non-US owner.
Section 6038A also imposes record keeping obligations on the US disregarded entity for transactions between itself, its owners, and other related parties and businesses.
The new reporting and record keeping obligations are effective for any tax year starting after 1 January 2017 and ending on or after 13 December 2017. As such, any US disregarded entity that must file Form 5472 will need to request an Employer Identification Number (“EIN”) from the IRS or use its owner’s EIN or Individual Taxpayer Identification Number (“ITIN”), if it has one.
Under the final regulations, the tax year of a US disregarded entity is the same as its foreign owner, if the foreign owner is required to file a US tax return. If the foreign owner has no US tax filing obligation the US disregarded entity is treated as having a calendar tax year.
Failing to timely file the Form 5472 or maintain the required records may result in the imposition of a penalty up to $10,000 against the US disregarded entity for each violation.
Clients wishing to discuss these final regulations are suggested to do so as soon as practical to ensure any restructuring is done before the 13 December 2017 deadline.