On March 30th, the US Treasury Department announced that proposed Treasury regulations will soon be issued requiring foreign-owned, single-member limited liability companies (LLCs) created in the USA to disclose to the Internal Revenue Service (IRS) full details of their beneficial owners.
I believe this announcement is in response to growing international criticism of the US, which has been accused of being a huge tax haven for foreigners. For example, under the Foreign Account Tax Compliance Act, (FATCA) the US demands foreign countries to report financial account details about US persons to the IRS. Yet, the US (through the critical International Governmental Agreements, IGAs, implementing FATCA) provides virtually nothing in return about the financial accounts in the USA that are maintained by the other country's citizens. In addition, the US has thus far, refused to sign on to "GATCA" - more officially known as the "Common Standard on Reporting and Due Diligence for Financial Account Information" as proposed by the OECD in 2014.
A couple of years after FATCA was enacted, the IRS issued Treasury Regulations setting out rules requiring US financial institutions to report to the IRS (note, not to report to any foreign country) bank deposit interest payments made by the US institution to nonresident alien individuals residing in certain foreign countries. This development was met with an outry by US financial institutions which feared a great loss of foreign clients with US deposits. An overview on this topic is here. While these Regulations will surely facilitate the exchange of information between the US and some foreign governments about their citizens and residents since the information will be readily at hand in the IRS data files, they do not mandate any automatic exchange of information.
The combination of weak IGAs, the lack of any legislation requiring US financial institutions to collect and disclose reciprocal information to foreign countries, the lack of US laws requiring that beneficial ownership of US corporations be revealed, and the US’ refusal to sign on to GATCA have not gone unnoticed in the international community. In a possible attempt at damage control, the Treasury Department announced on March 30 that proposed regulations will be issued to assist foreign countries in obtaining information regarding their own taxpayers. This announcement follows on the heels of other US regulatory actions designed to wash away the "US as tax haven" label.
The proposed Treasury Regulations will be issued under Internal Revenue Code Section 6038A, which requires certain foreign-owned US corporations to file a Form 5472 disclosing the identity of their foreign owners and reporting certain related-party transactions. The filing requirement generally applies when over 25% of the voting power or value of all classes of stock of the entity are "foreign" owned. A separate Form 5472 must be filed for each foreign shareholder who is a 25%-or-greater owner of the US corporation. The form is not required when various foreign persons own, in the aggregate, 25% or more of the corporation. It is required only when a single non-US entity or individual owns 25% or more of the corporation. Thus, if two or more foreign shareholders each own 25% or more of a US corporation, then multiple Forms 5472 will have to be filed.
Form 5472 generally requires the following information with regard to each 25%-or-greater foreign shareholder: name, address and country of citizenship (or in the case of an entity-shareholder, the country where it was organized or incorporated); the nature and amount of the reportable transaction with the foreign shareholder; names of the countries under whose laws the foreign shareholder files an income tax return as a resident; and names of the principal countries where that shareholder conducts business. You can learn more about Form 5472 at my tax blog post here.
Generally, for US tax law purposes only, when a US LLC is owned by a single owner (e.g., only one individual or only one corporation), the LLC is treated as a "disregarded entity". It is not treated as a "corporation" and the corporate form is disregarded for US tax purposes. This can be very useful in US tax planning and is often utilized by foreigners owning US real property.
What many foreign owners of a single-member US LLC particularly like is that US tax reporting requirements that might otherwise be applicable to a US "corporation" that is foreign-owned simply do not apply since the entity is not treated as a "corporation". This is particularly so when the entity owns no US assets and generates no US-source income. Well, things may be about to change. And for some, this change will mean things are about to get ugly.
The Treasury announcement in March indicates that the Form 5472 filing requirement will be extended to foreign-owned, single-member US LLCs. Under the proposed rules, these LLCs will be treated as "corporations" solely for the purposes of Internal Revenue Code Section 6038A. If the Regulations become effective, such LLCs will have to obtain US taxpayer identification numbers and through the filing of Form 5472, report the identity of their foreign owners to the IRS.
The penalty for failure to file Form 5472 is $10,000 per year, but the devil is in the details! Filing a substantially incomplete Form 5472 constitutes a failure to file the Form with the result that the penalty can be imposed; so filing the form but omitting information won’t count. Additional incremental penalties of $10,000 are imposed if the failure continues for over 90 days after notification is sent by the IRS. There is no ceiling on the total penalty, meaning that continued noncompliance can result in onerous penalties.
The writing is on the wall, and has been for some time now - the days of privacy have ended.
The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.
Virginia La Torre Jeker J.D.
Virginia La Torre Jeker J.D., is based in Dubai. Virginia has been a member of the New York Bar since 1984 and is also admitted to practice before the United States Tax Court. She has over 30 years of experience specializing in the international aspects of US tax, including FATCA. She has been quoted in the New York Times and Newsweek, and is regularly quoted in many local news articles and publications."
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