IRS Finalizes Regulations Regarding Reporting of U.S. Disregarded Entities Owned by Foreign Persons

Originally published by Thompson & Knight LLP.

Posted by John Cohn

In May, the IRS proposed regulations to require reporting foreign-owned domestic disregarded entities, ownership and the transactions in which they enter with related parties. See here. Yesterday, the IRS finalized these regulations (available here) making a few minor changes.

Under current law, a wholly-owned domestic limited liability company (LLC) generally is disregarded for U.S. tax purposes, unless it makes a “check-the-box” election to be classified as a corporation.  As a result, a foreign person owning a U.S. LLC has no U.S. reporting obligations with respect to the LLC if the LLC has no U.S. source income and does not conduct a U.S. trade or business.

The final regulations will treat such a domestic disregarded entity as a domestic corporation for the limited purposes of the reporting and record maintenance under Section 6038A of the Internal Revenue Code. Thus, the entity will now be required to obtain a U.S. employer identification number (EIN) and to designate a “responsible party” (that is, an individual who has a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets).  The entity will also 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, reporting certain transactions with related parties, including amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the entity, including contributions to and distributions from the entity.

The final regulations apply to taxable years of entities beginning on or after January 1, 2017, and ending on or after December 13, 2017. This is a minor change from the proposed regulations, which would have applied the rules to taxable years ending on or after the date that is 12 months after the date of publication of the final regulations in the Federal Register. The final regulations also clarify that many of the exceptions to filing IRS Form 5472 will not apply to foreign-owned domestic disregarded entities.

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