The IRS has released an updated Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) and accompanying Instructions, incorporating new regulatory filing requirements with respect to foreign-owned US disregarded entities (DEs).

Background

Final regulations

Under final regulations issued on December 13, 2016 (TD 9796, the Final Regulations), a foreign-owned US DE must file Form 5472 and report transactions with its sole owner, as well as any other affiliates as if it were a domestic corporation as specified under Treasury Reg. Section 1.6038A-2. For a detailed discussion of the Final Regulations, see Tax Alert 2016-2155. The Final Regulations made limited changes to proposed regulations issued on May 10, 2016 (see Tax Alert 2016-0840), including adopting a calendar year as a default tax year in certain cases and amending the effective date.

Default tax year. If the foreign owner has no US return filing obligation, the tax year of the foreign-owned US DE is the calendar year unless otherwise provided in forms, instructions or published guidance.

Applicability date. The Final Regulations apply to tax years of the foreign-owned US DEs beginning after December 31, 2016, and ending on or after December 13, 2017.

How to file Form 5472

Each foreign-owned US DE that is subject to the filing requirements must obtain an EIN by filing a Form SS-4 (Application for Employer Identification Number) that includes responsible-party information, including the responsible party's SSN, ITIN or EIN. The "responsible party" is defined in the Form SS-4 instructions as the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. The person identified as the responsible party should have a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the person, directly or indirectly, to control, manage or direct the entity and the disposition of its funds and assets. Unless the applicant is a government entity, the responsible party must be an individual (i.e., a natural person), not an entity.

Form 5472 should be attached to a pro forma Form 1120 that is completed by the foreign-owned US DE and include its name, address and Items B and E on Page 1 of the Form 1120 (EIN and information about whether the return is an initial return and whether there has been a name or address change, respectively) . In addition, "Foreign-Owned U.S. DE" must be written across the top of Form 1120.

A foreign-owned US DE may not e-file its Form 5472. Rather, it must attach its Form(s) 5472 to the pro-forma Form 1120 and file by:

1. Fax: (855)887-7737 or

2. Mail: Internal Revenue Service, 201 West Rivercenter Blvd., PIN Unit, Stop 97, Covington, KY 41011

Changes to Form 5472

The revised Instructions to Form 5472 note three changes to the form to reflect the changes made by the Final Regulations.

In Part I, Line 3 is added to indicate that a foreign-owned US DE is filing Form 5472.

In Part II, Lines 1-4, boxes are added to request a foreign taxpayer identifying number, if any, of a foreign owner of a foreign-owned US DE.

A new Part V is added to identify certain reportable transactions of foreign-owned US DEs. This is used for the transactions that are not reported in Part IV and covers amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the entity, including contributions to and distributions from the foreign-owned US DEs. A short description of the transactions must be attached to Form 5472.

Implications

To complete the Form 5472, a foreign-owned US DE must obtain an EIN, a potentially time-consuming process due to the EIN application's requirement for detailed responsible-party information. Because obtaining an ITIN can often take several months, taxpayers should begin determining who the ultimate responsible party is and, if that person does not already have an ITIN, begin the application process.

In certain cases when the foreign owner of the US DE already is obligated to report the income resulting from transactions with the US DE — for example, transactions resulting in income effectively connected with the conduct of a US trade or business that the foreign owner must report on a Form 1120-F that includes a Form 5472 — the US DE's separate Form 5472 filing requirement may result in duplicative filings, in some cases one that may be filed electronically and one that must be filed via fax or mail. The instructions to the Form 5472 do not address cases such as this, presumably because Treasury and the IRS expressly solicited comments on this issue in the proposed regulations, and received none. Future versions of the Form 5472 instructions may, however, address these duplicative filing situations.

In addition, although the Form instructions provide that the penalty for noncompliance with the Form 5472 filing requirement is $10,000, the Tax Cuts and Jobs Act increased the applicable penalty in Section 6038A(d)(1) from $10,000 to $25,000, effective for tax years beginning after December 31, 2017. The statutory language of Section 6038A(d)(1) extends not only to information relating to new Section 59A (the base erosion and anti-abuse tax or BEAT) but to any reporting required under Section 6038A(b), which includes foreign-owned DE reporting.

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