United States

IRS proposes new foreign information reporting for certain DREs

TAX ALERT  | 

The IRS has announced new proposed regulations that would impose foreign information reporting requirements on domestic disregarded entities wholly-owned by a foreign person. The IRS stated that this information is needed in order to satisfy its obligations under U.S. tax treaties and tax information exchange agreements.

Under the newly proposed regulations, a domestic disregarded entity wholly-owned by a foreign person would be treated as a domestic corporation, separate from its owner, for the limited purposes of reporting and record maintenance requirements under section 6038A. Current regulations under section 6038A impose reporting and recordkeeping requirements on domestic corporations that are 25 percent foreign-owned. Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, is generally required to be filed with respect to each related party with which the reporting corporation has had a ‘reportable transaction.’ If adopted, these regulations will require a single member limited liability company (LLC) that has a reportable transaction with its foreign owner to report such transactions on Form 5472 beginning in taxable years ending on or after the date that is 12 months after the date final regulations are adopted.

While domestic disregarded entities, such as single-member LLCs, are generally not required to obtain an employer identification number (EIN), an EIN is required in order to file a Form 5472. Therefore, the proposed regulations would not only impose new filing requirements but would also require foreign owned domestic disregarded entities to obtain an EIN.

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