US TREASURY & IRS RELEASE FINAL REGULATIONS ON REPORTING OF FOREIGN-OWNED LLCS
Por: Cason Benham- Diego Sardone Final regulations have been issued by the United States Treasury Department and Internal Revenue Service (IRS) regarding wholly foreign-owned (directly or indirectly) domestic disregarded entities as subject to Section 6038A. These entities are now required to obtain a US tax identification number (TIN) as well as file annual returns in most circumstances. The purpose of these regulations is to “enhance the United States’ compliance with international standards of transparency and exchange of information for tax purpose” and aim for a strengthening of “the enforcement of US tax laws”. An entity with a single owner not classified as a corporation, such as a domestic limited liability company (LLC), is generally disregarded as separate from its owner under US tax regulations. These disregarded entities generally do not face a requirement to obtain a TIN or an employer identification number (EIN) nor to file an annual return. However, when 25% or more of the entity is owned by a single foreign owner, these entities are treated as domestic corporations subject under Section 6038A to filing Form 5472- disclosing the identity of foreign owners- as well as reporting additional transactions and keeping sufficient records. In order to file 5472, entities must obtain an EIN through Form SS-4, which calls for any responsible party’s social security number (SSN), EIN or TIN. The newly released regulations extend the 5472, and subsequently SS-4, filing requirements to any foreign-owned, single member entity. Under these regulations, a foreign person is considered to wholly own an entity if they have direct or indirect sole ownership. Indirect sole ownership would be defined as “ownership by one person entirely through one or more disregarded entities or through one or more grantor trusts, regardless of whether any such disregarded entity or grantor trust is domestic or foreign”. Under these final regulations, reporting corporations are deemed to have the same tax year as their foreign owner if that foreign owner has US filing obligations. If the foreign owner does not face any filing obligations, reporting corporations are deemed to have a calendaryear tax year. As such, the regulations apply to entities’ tax years beginning on or after January 1, 2017 until on or after December 13, 2017. Exceptions exist for these regulations. A reporting corporation will not be required to file 5472 when a US person controls the foreign related corporation and files Form 5471. A reporting corporation will also not be required to file 5472 if the related corporation qualifies as a foreign sales corporation for a tax year in which it files Form 1120-FSC. Wealth advisors and private clients are encouraged to practice mindfulness regarding these regulations and US intentions to collect and share information on foreign investors. The practice of obtaining a TIN and/or EIN can take several months, so taxpayers should determine ultimately responsible parties as soon as possible and begin the application process.