New proposed reporting requirements for foreign-owned DREs
TAX BLOG |
Newly announced proposed regulations would impose foreign information reporting requirements on domestic disregarded entities (DREs) wholly owned by a foreign person. Under the new rules, a domestic DRE wholly owned by a foreign person would be treated as a domestic corporation separate from its owner.
Therefore, such entities would 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, when engaged in certain related-party reportable transactions.
This requirement does not exist under current law and would result in a new filing requirement for a variety of taxpayers. In particular, Mexican- and Canadian-based groups with U.S. DREs, such as U.S. limited liability companies (LLCs), would likely need to complete these forms though they had no filing requirement before.
The proposed regulations are generally expected to be effective for taxpayers with tax years ending on or after the date falling one year after final regulations are issued. In order to comply with the new rules, DREs would first need to obtain a U.S. employer identification number.
Should the proposed regulations be adopted, foreign-based multinationals operating in the United States through single member LLCs or other DREs should expect an additional and potentially costly compliance burden.