Tuesday, July 26, 2016

Treasury Department Proposes to Impose Additional Tax Reporting Obligation on Foreign Owned LLCs

Treasury Department Proposes to Impose Additional Tax Reporting Obligation on Foreign Owned LLCs

       The Treasury Department, on May 5, 2016, proposed regulations that would increase the reporting and record maintenance requirements of US organized disregarded entities (typically single member LLCs) owned by foreign persons.
      In support of the objective of receiving additional information with respect to these foreign-owned disregarded entities, the Treasury began with a definitional sleight-of-hand; a domestic disregarded entity that is wholly owned by a foreign entity or person will be treated as if it is a domestic corporation. As a corporation, the disregarded entity will be treated as separate from its owner for the purpose of all reporting, record maintenance and other compliance requirements that are already apply with respect to domestic corporations that are owned 25% or more by foreign entities or persons. The proposed regulations require that, each foreign-owned disregarded entity (“FODE”):
·         file a Form SS4 with the IRS, thereby obtaining a Federal Tax Identification Number and as well identifying to the IRS who is a “responsible party” with respect to the FODE;
·         file, on behalf of the FODE, IRS Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in U.S. Trade or Business setting forth, irrespective of whether they are subject to federal income tax, reportable transactions between the FODE and its foreign owners or foreign related parties; and
·         maintain records sufficient to establish the accuracy of any Form 5472 and in the US tax treatment of those transactions.

      If finalized, and there is little reason to think they will not be, these regulations will constitute a significant change with respect to the treatment of FODE’s. Currently, most FODE s do not file a Form SS-4 and are not subject to either tax reporting or record maintenance obligations under the Internal Revenue Code. These proposed regulations would affect a 180° change in that treatment. Further, as the IRS would have new information with respect to the US activities of FODE’s, the IRS may share that information with foreign tax authorities pursuant to various information sharing agreements to which the US is a party.
      HERE IS A LINK to the proposed regulations as published in the Internal Revenue Bulletin.

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