Foreign Owned Single Member US LLCs: Final Reporting Requirements
Foreign Owned LLCs that are Disregarded Entities
On December 12, 2016, the Treasury and IRS published final regulations that will require foreign owned single member US LLCs - that for most purposes have been treated as disregarded entities for US tax purposes (and therefore not required to obtain a US EIN or file a US tax return) - to be treated as a domestic corporation for reporting purposes under Sec. 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 that it will apply for calendar year 2017 reporting purposes. Note: this regulation will impact foreign individuals who own a US LLC (single member) and have not had to file a Form 5472 because it only applied to corporations.
Final Regulation Modifications
The proposed regulations already had disallowed the exception from reporting for these type entities under the small corporation and de minimis transaction exemptions. The final regulations add two additional exceptions that are not applicable to these LLCs:
- LLCs where a US person is filing a Form 5471 related to its ownership of the foreign owner of the LLC, and
- Transactions involving FSCs.
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 US return filing obligation, or the calendar year (subject to other guidance to be issued). This is to facilitate compliance with these rules.
Must Now File for US ID Number
The impact of this means the US LLC will have to obtain a US Employer Identification Number (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 also report any subsequent change in the responsible party.
In many cases, reporting will also be required in the form of completing information required of a 25% 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 US 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.
IRS Wants More Access to Information for Entities That in the Past Have Not Had to Report
These changes are intended to provide the IRS with improved access to information that it needs to satisfy its obligations under US tax treaties, and similar international agreements, as well as to strengthen the enforcement of US tax laws. This will not necessarily change any of the US tax return filing requirements (other than the ones mentioned above) or the US 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 US authorities (including the Form 114 FBAR filings that may be required).
Effective Date of Change
The regulations are effective December 13, 2016, and apply to tax years beginning on or after January 1, 2017, and ending on or after December 13, 2017. This is a modification to the proposed effective dates and will allow for calendar year LLCs to reorganize and terminate their US existence prior to December 13, 2017. Otherwise, calendar year 2017 LLCs will have to comply with these new rules.
Contact Moore Stephens Doeren Mayhew with any questions regarding these new reporting requirements.
Victor (Sandy) Jose, CPA
For more than 35 years, Victor (Sandy) Jose has assisted clients with their inbound and outbound investments, Foreign Account Tax Compliance Act (FATCA) compliance, Offshore Voluntary Disclosure Program projects, as well as other withholding and reporting projects. Sandy has extensive and broad based global experience in the automotive and manufacturing industries. Contact Sandy at firstname.lastname@example.org or (248) 244-3082.