As of January 1, 2017, U.S. Limited Liability Companies (“LLCs”) that are wholly owned, directly or indirectly, by one foreign person, are required to file an annual return on IRS Form 5472. Foreign Grantor Trusts (FGT) are specifically included in the new regulation.
Non-U.S. Person Treated as a U.S. Person
The IRS considers a FGT to be a non-U.S. person or nonresident alien (NRA) for U.S. tax purposes. Previously, the FGT filed a return if it earned U.S. Effectively Connected Income (“ECI”) or U.S. Fixed, Determinable, Annual or Periodic income (“FDAP”). Now the LLC must use IRS Form 5472 to report transactions between itself and its foreign owner.
The new IRS regulation treats the FGT as a domestic corporation and a reporting corporation, solely for purposes of certain IRS information reporting and recordkeeping requirements. Despite the name of the form, the FGT must submit its reporting on IRS Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.
Rationale
The IRS justified this increased reporting by stating that the reported information will enhance U.S. compliance with international standards of transparency and exchange of information for tax purposes and will strengthen the enforcement of U.S. tax laws.
Reportable Year
A FGT has the same taxable year as its foreign owner if the foreign owner has a U.S. return filing obligation. If the foreign owner has no U.S. return filing obligation, then the new reporting obligation requires that the FGT use the calendar year.
The new reporting requirement applies to taxable years of FGTs beginning on or after January 1, 2017 and ending on or after December 31, 2017.
If a FGT must file a U.S. income tax return for the year. The IRS Form 5472 must be filed with the U.S. income tax return or it will not be considered timely filed.
Penalties
The FGT is required to maintain books or records related to its IRS Form 5472 reporting. The books or records must be retained as long as they may become material in the administration of any U.S. internal revenue law.
If the FGT fails to maintain relevant records, the IRS may assess monetary penalties. The IRS may also assess monetary penalties if the FGT fails to file its IRS Form 5472. Additionally, the IRS may impose criminal penalties if the FGT fails to submit information or files false or fraudulent information.
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