On Dec. 12, 2016, the Treasury Department and Internal Revenue Service (IRS) published final regulations requiring foreign-owned single member U.S. limited liability companies (LLCs) — that for most purposes have been treated as disregarded entities for U.S. tax purposes (and therefore not required to obtain a U.S. Employee Identification Number (EIN) or file a U.S. tax return) — to be treated as a domestic corporation for reporting purposes under Section 6038A. While these entities can elect to be treated as a corporation, the default treatment is to treat them as a disregarded entity where income is considered earned by the single member. The timing of the final rules was anticipated so it will apply for calendar year 2017 reporting purposes. Note: This regulation will impact foreign individuals who own a U.S. LLC (single member) and have not had to file a Form 5472 because it only applied to corporations.
The proposed regulations already had disallowed the exception from reporting for these types of entities under the small corporation and de minimis transaction exemptions. The final regulations add two additional exceptions that are not applicable to these LLCs:
The final regulations also set forth rules on the year-end for the LLC: either the year-end of the foreign owner if it has a U.S. return filing obligation, or the calendar year (subject to other guidance to be issued). This is to facilitate compliance with these rules.
The impact of this means the U.S. LLC will have to obtain a U.S. EIN, which requires the listing of a “responsible party.” The instructions to the form define this to be “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 disposition of its funds and assets.” The entity must report any subsequent change to the responsible party.
In many cases, reporting will also be required in the form of completing information required of a 25 percent foreign-owned domestic corporation (Form 5472). Furthermore, certain de minimis exceptions to completion of the form and recordkeeping requirements would not apply to foreign-owned single member U.S. LLCs. The penalty provisions associated with failure to file the Form 5472 and failure to maintain records would apply to this situation ($10,000 per year).
Disregarded entities will be required to report all transactions with foreign-related parties. The term “transaction” is defined to include any sale, assignment, lease, license, loan, advance, contribution, or other transfer of any interest in or a right to use any property or money, as well as the performance of any services for the benefit of, or on behalf of, another taxpayer.
These changes are intended to provide the IRS with improved access to information it needs to satisfy its obligations under U.S. tax treaties, and similar international agreements, as well as to strengthen the enforcement of U.S. tax laws. This will not necessarily change any of the U.S. tax return filing requirements (other than the ones mentioned above) or the U.S. tax liability from having a foreign-owned single member LLC. This may still be a good structure to consider in appropriate situations. However, it highlights the increased risk of penalties for failure to file information reports with the proper U.S. authorities (including the Form 114 FBAR filings that may be required).
The regulations are effective Dec. 13, 2016, and apply to tax years beginning on or after Jan. 1, 2017, and ending on or after Dec. 13, 2017. This is a modification to the proposed effective dates and will allow for calendar year LLCs to reorganize and terminate their U.S. existence prior to Dec. 13, 2017. Otherwise, calendar year 2017 LLCs will have to comply with these new rules.
For more information or questions regarding these new reporting requirements contact the international advisors at Moore Stephens Doeren Mayhew.
This article is a reprint from Moore Stephens Doeren Mayhew GlobalVIEW.
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