Please note the TCJA changes at the end of this post below. This post was updated January 2019.

The IRS recently issued final regulations that impose reporting obligations on a domestic disregarded entity wholly owned by a foreign person.  Therefore, as of January 1, 2017, Limited Liability Companies (LLCs) formed in the United States, which are treated as disregarded entities and wholly owned by foreign persons, become subject to new IRS reporting requirements.  These new regulations apply to taxable years of entities beginning on or after Jan 1, 2017 and ending on or after Dec 13, 2017 although the IRS has modified the proposed regulations so that any US LLC dissolved before Dec 13, 2017 will not need to file any US returns in the 2018 calendar year.

The final regulations amend Treasury Regulation section 301.7701-2(c) to treat a foreign-owned disregarded entity as separate from its owner for purpose of the reporting, record maintenance requirements and other compliance requirements under Internal Revenue Code Section 6038A.  The regulations impose reporting obligations but do not create a new tax obligation. Therefore, foreign-owned disregarded entities (i.e., single-member LLCs) remain disregarded for income tax purposes.

As defined by the IRS, a foreign person includes a non-resident alien individual, foreign corporation, foreign partnership, foreign trust, a foreign estate, and any other person that is not a U.S. person.

Under these regulations, foreign-owned disregarded entities are required to obtain an Employer Identification Number (EIN) and in order to do so, they must designate a ‘responsible person’, who is “the 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 must also report any subsequent change in the responsible party.

Foreign-owned single-member US LLCs will now be required to file a Form 5472 informational return if there have been any ‘reportable transactions’ during the tax year and they are required to maintain adequate records to support the filing Form 5472, for as many years as necessary.  The ‘reportable transactions’ include any sale, assignment, lease, license, loan, advance, contribution, or other transfer of any interest in or right to use any property or money between the LLC and its foreign owner or other foreign related parties. After the LLCs are dissolved, cancelled or liquidated, they are also required to file a final Form 5472. In addition, because the LLCs now have a filing obligation, they are required to obtain an EIN by filing Form SS-4 that includes responsible party information.

Please note, 2018 US filing obligations are required for US LLC in existence prior to Dec 13, 2017.  For tax years beginning after December 31, 2017 the penalty for failure to file Form 5472 on a timely basis was increased from $10,000 to $25,000 by the Tax Cuts and Jobs Act. If the form is submitted on time but is incomplete or inaccurate, it is considered to be late and subject to the $25,000 penalty.

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