Foreign-Owned U.S. LLCs must file Form 5472 Together with NR Tax Return
Keyt Law Attorneys advise that foreign persons who own 100% of US LLCs must file form 5472 or face heavy penalties. This reporting requirement was created in 2016, but first due for submission in 2018. Detailed explanation of it can be found in the Treasury Regulation.
The regulation states that foreign-owned LLC are considered reportable disregarded entities, separate from their owner and will be taxed as domestic corporations in accordance with Section 6038A. Any reportable disregarded entity must file a Form 5472 and Form 1120 if it had at least one reportable transaction with a related person during the tax year.
What is a Reportable Transaction
Part IV of Form 5472 gives an extensive list of any transaction that is considered reportable. Here are some of them:
- Sales and purchases of inventory
- Received and paid out royalties
- Sales and purchases of tangible properties
- Commissions paid and received
- Premiums received from insurances
- Paid interests
- Money borrowed and loaned
To be considered reportable transactions these (and the rest listed in the form) need to prove that:
- Only monetary consideration was received (in US and foreign currency), or
- A part of the consideration was not monetary
What is a Related Party
A related party can be one of the below.
- Any direct or indirect 25% member of a reportable disregarded entity
- Any person who is related to the reportable disregarded entity (please check for conditions in section 267(b) or 707(b)(1)).)
- Any person who is related to the 25% member of the reportable disregarded entity (same conditions for relation apply).
- Any other person related to the reportable disregarded entity within the meaning of Section 482.
If you fail to file Form 5472 and Form 1120 (please note they can’t be filed separately), you can face a penalty of $10,000. In addition, if you miss the deadline and the IRS sends you a notification you will have 90 days to file the forms. Failure to do so will result in another $10,000 followed by the same amount for each 30-day period after the 90-day deadline for which you didn’t file. Filing the forms inaccurately or incompletely will result in the same penalties because they will be regarded as not filed.
What to Do
If you are a foreign person with a reportable disregarded entity, you need to take the following steps to avoid penalties:
- Have either ITIN or EIN for the responsible party.
- Have an EIN for the LLC.
- Have a comprehensive booking system to keep track of transaction needed for the completion of Form 5472.
- Have a knowledgeable CPA who can move the process for you.
If you find yourself in a position where you feel stuck FAS CPA & Consultants will be glad to assist you.
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