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Expanded IRS tax regulations apply to a broader number of foreign corporations and include bookkeeping requirements. Penalties for noncompliance are stiff.

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Global Companies: Your U.S. Disregarded Entity (DRE) May Need to File Form 5472

  • Mike Smith
  • 6/2/2017

If your international company has a domestic disregarded entity (DRE) in the United States, you may need to file IRS Form 5472 going forward. Failure to comply could result in a fine of $10,000, suspension of the statute of limitations on your entire tax return for the year at issue, and possibly even criminal penalties.

The intentions behind the expanded reporting obligation and the steep penalties are to enforce compliance with federal information reporting tax laws and improve the quality, transparency, and accessibility of corporate financial records.

Expanded definition of “reporting corporations”

The U.S. Treasury and IRS issued final regulations in December 2016 under IRC Section 6038A that expand the category of “reporting corporations” subject to Form 5472 reporting and record maintenance requirements to include all foreign-owned domestic DREs. Previously, a reporting corporation was a 25 percent foreign-owned U.S. corporation or a foreign corporation engaged in U.S. trade or business that entered into reportable transactions (i.e., those transactions that impact the computation of taxable income). Those most likely affected by the new regulations include:

  • Foreign corporations that hold their U.S. branch operations in a domestic DRE  
  • Foreign corporations and individuals that hold passive-type assets (e.g., stock in a foreign subsidiary, foreign-issued corporate bonds, etc.) through a domestic DRE
  • U.S. corporations and individuals that hold domestic DREs through controlled foreign corporations (CFC)

Reporting related-party transactions

The new regulations treat your foreign-owned domestic DRE as a reporting corporation for the limited purpose of reporting related-party transactions on Form 5472. They also require the DRE to maintain a permanent set of books and records that establish the correctness of the information reported on the form.

It is worth noting that under the old Form 5472 reporting regulations, a foreign owner would report related-party transactions of its domestic DRE only if the DRE conducted a U.S. trade or business (i.e., the U.S. DRE had to be a branch). The new regulations represent a significant departure from prior rules. Essentially all related-party transactions involving a foreign-owned domestic DRE must now be reported on Form 5472, including transactions affecting the computation of taxable income and capital-related transactions. These transactions include capital contributions, entity liquidations, and distributions of cash and property.

In addition, Form 5472 should be filed by a domestic DRE even in cases where the DRE is owned by a CFC and the CFC’s U.S. shareholder reports its ownership interest in the foreign corporation using Form 5471.

Effective dates

The new filing requirements apply to taxable years of foreign-owned domestic DREs beginning on or after January 1, 2017, and ending on or after December 13, 2017.

How we can help

If your corporation is affected by these regulations, CLA’s global tax services can help your domestic DRE comply by: 

  • Setting up and maintaining separate general ledger books and records
  • Obtaining taxpayer identification numbers from the IRS using Form SS-4
  • Reporting related-party transactions to the IRS using Form 5472