Final rules require 5472s from foreign-owned disregarded entities
TAX BLOG |
Recently the Treasury released final regulations requiring information reporting from foreign-owned domestic disregarded entities. Previously an opaque area, these new regulations demonstrate U.S. commitment to transparency and information exchange in the international tax area.
As a general rule, corporations and partnerships are required to provide the IRS certain ownership and financial data. Domestic disregarded entities, however, are required to provide no such information. Thus, U.S. disregarded entities wholly owned by a foreign person or entity were not subject to reporting requirements so long as the disregarded entity or its foreign owner did not receive any U.S. source income or engage in a U.S. trade or business.
Under the final regulations, however, foreign-owned domestic disregarded entities must now file information returns with the U.S. for the first time. These new reporting requirements dictate that:
- The disregarded entity acquire an employer identification number
- Form 5472 be filed for each foreign-owned domestic disregarded entity and;
- Detailed books and records of the disregarded entities activity be maintained
In addition, the final regulations exclude several generally applicable reporting exceptions from application to foreign-owned U.S. disregarded entities and require U.S. domestic entities with foreign owners having no U.S. filing obligation to report on a calendar year basis.
As the 2017 compliance season approaches these new reporting requirements should be considered by advisors and clients alike, as they come with a hefty penalty and represent a major change from previous reporting requirements.
For more on these regulations see Foreign-owned disregarded entities must now file Form 5472.