Major New Reporting Requirements for Foreign-Owned Single-Member LLCs

By:
Lisa S. Goldman, CPA
Published Date:
Mar 1, 2017

The Treasury Department has clamped down on a key reporting exemption that foreign-owned, single-member limited liability companies (LLCs) previously enjoyed, significantly impacting any foreign person or entity with holdings in U.S. single-member LLCs that are disregarded for federal income tax purposes. Previously, these entities were exempt from the comprehensive record maintenance and associated compliance requirements that long applied to 25% foreign-owned domestic corporations under IRC section 6038A. Now, substantially any transaction between U.S domestic disregarded entities and their foreign owners—including any of the owner’s related entities—may be reportable.

These regulations are part of a larger effort by the Treasury Department to increase financial transparency. Entities subject to these regulations will continue to be treated as disregarded entities for other federal tax purposes. The Treasury Department explained that there is a class of foreign-owned U.S. entities—typically single-member LLCs—that have no obligation to report information to the IRS or even obtain a tax identification number. According to the government, these “disregarded entities” could be used to shield the foreign owners of non-U.S. assets or bank accounts. By treating domestic disregarded entities that are wholly owned by a foreign person as a domestic corporation separate from its owner (for these limited reporting and compliance requirements), the regulations enable the IRS to determine the existence and magnitude of any tax liability, as well as to share information with tax authorities in other countries.

Implications

Previously, certain disregarded entities and their foreign owners may not have had an obligation to file a tax return or obtain an EIN. The final regulations require foreign owned domestic disregarded entities to

  • obtain EIN numbers from the IRS by filing a Form SS-4 with responsible party information, including the responsible party’s SSN, ITIN or EIN;
  • annually file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business;
  • identify “reportable transactions” between the LLC and any related parties, including the LLC's foreign owner; and
  • maintain supporting books and records.

Regulations

These rules treat U.S. disregarded entities as stand-alone foreign-owned domestic corporations. Therefore, they are now required to file Form 5472 with respect to reportable transactions between the entity and its foreign owner or other foreign related parties, just as if the entity had been a corporation for U.S. tax purposes. These entities also are required to maintain records sufficient to establish the accuracy of the information return and the proper U.S. tax treatment of such transactions.

To ensure that such entities report all transactions with foreign related parties, the regulations created a new reportable category for any transaction (described under Treasury Regulations section 1.482-1(i)(7)) that includes any sale, assignment, lease, license, loan, advance, contribution, or any other transfer of any interest in or a right to use any property (whether tangible or intangible, real or personal) or money, however such transaction is effected, and whether or not the terms of such transaction are formally documented. Amounts paid or received in connection with the formation, dissolution, acquisition, and disposition of the entity—including contributions to and distributions from the entity—are also included in this new reportable category.

The regulations contain examples of reportable transactions that require reporting: 

Example (1). (i) In year 1, W, a foreign corporation, forms and contributes assets to X, a domestic limited liability company that is considered a domestic disregarded entity wholly owned by a foreign corporation. In year 2, W contributes funds to X. In year 3, X makes a payment to W. In year 4, X, in liquidation, distributes its assets to W.

(ii) X is treated as an entity separate from W and classified as a domestic corporation for purposes of reporting under section 6038A. Each of the transactions in years 1 through 4 is a reportable transaction with respect to X. Therefore, X has a section 6038A reporting and record maintenance requirement for each of those years.

Example (2). (i) The facts are the same as in Example 1 except that, in year 1, W also forms and contributes assets to Y, another domestic limited liability company that is considered a domestic disregarded entity wholly owned by a foreign corporation. In year 1, X and Y form and contribute assets to Z, another domestic limited liability company that that is considered a domestic disregarded entity wholly owned by a foreign corporation. In year 2, X transfers funds to Z. In year 3, Z makes a payment to Y. In year 4, Z distributes its assets to X and Y in liquidation.

(ii) Y and Z are disregarded as entities separate from each other, W, and X.  However, X, Y and Z are all treated as entities separate from each other and W, and they are classified as domestic corporations for purposes of section 6038A. Each of the transactions in years 1 through 4 involving Z is a reportable transaction with respect to Z.Similarly, W's contribution to Y and Y's contribution to Z in year 1, the payment to Y in year 3, and the distribution to Y in year 4 are reportable transactions with respect to Y. Moreover, X's contribution to Z in Year 1, X's funds transfer to Z in year 2, and the distribution to X in year 4 are reportable transactions with respect to X. Therefore, Z has a section 6038A reporting and record maintenance requirement for years 1 through 4; Y has a section 6038A reporting and record maintenance requirement for years 1, 3, and 4; and X has a section 6038A reporting and record maintenance requirement in years 1, 2, and 4 in addition to its section 6038A reporting and record maintenance described in Example 1.

Elimination of Exceptions to Reporting Under IRC section 1.6038A-1(h) and (i)

The Treasury Department’s and the IRS’s intent is that generally applicable exceptions to the requirements of IRC section 6038A will not apply to a domestic disregarded entity that is wholly owned by a foreign person. Accordingly, the new regulations eliminate the reporting exceptions for small corporations and de minimis transactions described in IRC section 1.6038A-1(h) and (i) in these situations.

For example, the exceptions to the record maintenance requirements for (i) small corporations that have less than $10 million in U.S. gross receipts for a tax year and (ii) transactions considered de minimis have been eliminated. In this case, “de minimis” is defined as any tax year in which the aggregate value of gross payments that the reporting corporation makes to and receives from foreign related parties with respect to related party transactions does not exceed $5 million and is less than 10% of its U.S. gross income.  

Furthermore, the final regulations address special overlap rules affecting controlled foreign corporations and foreign sales corporations.

Tax Year

The final regulations require the domestic reporting corporations to have the same tax year as their foreign owner if that foreign owner has an existing U.S. reporting obligation. If the foreign owner has no U.S. return filing obligation, then the domestic reporting corporation must report on a calendar year basis.

Effective Date

The final regulations were effective Dec. 13, 2016, and they apply to tax years beginning on or after Jan. 1, 2017 and ending on or after Dec. 13, 2017.


Lisa S. Goldman, CPALisa S. Goldman, CPA, is partner-in-charge of wealth management at Raich, Ende, Malter & Co. LLP, with more than 20 years' experience serving Fortune 500 corporations and privately owned companies in the real estate, manufacturing, and consumer products industries. She specializes in international taxation and in providing services for both high-net-worth individuals and their businesses. Ms. Goldman is a trust and estate practitioner (TEP) under the auspices of STEP and is a member of the NYSSCPA’s International Taxation Committee and the AICPA Tax Division. She frequently writes and lectures on international tax topics. She can be reached at 212-944-4433 or lgoldman@rem-co.com.

 
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