IRS Form 5472, new requirements for foreign-owned US companies
An easy-understanding guide of the IRS Form 5472
Despite the political turnaround that has taken place in The White House and the uncertainty created about how this change will affect its economic future, the United States was, is and will continue to be a very attractive market to do business. There are many strong sectors and bullish trends, the metallurgical, banking sector, life insurers, oil services, paper and mobile telecommunications, as well as other sectors that enjoy very positives growth perspectives such as industrial engineering, financial services, transportation, technological hardware, electronic products, aerospace, media, automotive, travel and leisure, chemical and technological companies software. Also, in the US there are still pro-business states where it is simple, easy and cheap to set up a company and privacy is preserved.
The US is a market full of business opportunities, but it also has a legal policy and tax code that can become complicated and problematic, requiring a full knowledge of it to avoid fines and sanctions. Foreigners doing business in the USA are required for the annual submission of the Internal Revenue System (IRS) Form 5472, reporting foreign holding of a US company. In this article, we provide an IRS Form 5472 help guide and the new rules that have come into force last December 2016, so that those interested can easily understand what it is and who must file it.
What is the IRS Form 5472?
IRS Form 5472 “Information Return of Foreign-Owned US Corporation or Foreign Corporation Engaged in a US Trade or Business” is an annual statement to the Internal Revenue Service (IRS) of an enterprise which at least 25 percent of its capital is directly or indirectly American foreign-owned or a foreign corporation engaged in a business in the United States. Like many forms of the IRS, the information requested can be daunting.
The IRS Form 5472 purpose is to avoid abuses and income tax evasion in local and foreign transactions between US corporations and their foreign shareholders by developing information about the company and its related parties and to audit the nature and amounts of such trades.
Following the amendment of the IRS Form 5472 rules that came into effect on December 13, 2016, the IRS prevents domestic disregarded entities (DDE), such as LLC, that are wholly owned by foreign natural or legal persons from benefiting from certain exemptions from the filing of Form 5472. DDE will be treated as national corporations, separate from their owner for reporting, recordkeeping and other mandatory requirements.
What is a Reportable Transaction?
Reportable transactions are listed in IRS Form 5472 Part IV and detailed in IRS Form 5472 instructions. A reportable transaction for IRS is understood as the exchange of money or property with the foreign shareholder, such as payments for sales, rent, royalties or interests. Reportable transactions include loans between the corporation and the foreign shareholders in both directions. In shareholder loans to the corporation, interest paid by the corporation may be tax deductible to the corporation, while, on the part of the shareholder, the interest charged may be subject to US taxation. With a withholding tax of a maximum of 30%, unless it meets the portfolio interest exemption, which must meet certain specific requirements (Form W8 BEN). In the case that the interest rate applied to the loan is lower than the market rate (Applicable Federal Rate) or free of interest, the IRS may charge an appropriate interest rate. The IRS will analyze the transaction according to its content to avoid disguised distributions of benefits, which are subject to a tax at a maximum of 30% and are not deductible.
It is noteworthy when filling out the IRS Form 5472, it must be taken into account that the US has signed many tax treaties and agreements to exchange tax information with other countries, so if the foreign shareholder resides fiscally in a jurisdiction that complies with the FATCA (Foreign Account Tax Compliance Act) and it is reported revenues related to transactions made in the US territory, he may be exposed to fines and penalties if the statements do not match.
Who is required to file the IRS Form 5472?
Below, we will detail all the aspects to take into account in the three cases in which the filing of Form 5472 is required.
Each of the foreign shareholders (entities or individuals) who own directly or indirectly at least 25% of the company’s property and has a reportable transaction with it, must submit the form 5472 separately. The required information is Name, address, and country of citizenship/incorporation, nature and total of the reportable transaction with the shareholder, countries where the shareholder declares his taxes as resident and countries where he carries out economic activities.
2. Domestic Disregarded entity wholly owned by foreign US natural or legal person
As mentioned before, on December 13, 2016, the IRS issued a final regulation, which is subject to organizations beginning their fiscal year on December 31, 2016 or ending after December 12, 2017, by which transactions between domestic disregarded entities (DDE) that are wholly owned by foreign natural or legal person with their foreign owner are considered a reportable transaction. Being treated as national corporations, separated from their foreign owner, and obligated to report, record keeping and other requirements to check the accuracy of the IRS form, the right US Tax treatment and determine taxable income and the income tax return obligation.
Any LLC that has a reportable transaction with its foreign owner must have filed the IRS Form 5472 and required to obtain a US Tax Identification and have an Employer Identification Number (EIN), by filing the SS-4 Form. Another change in regulation is that the foreign-owned DDE fiscal year will coincide with that of the foreign owner if he has a US tax return obligation, otherwise, it will be applied natural calendar.
The third case in which is enforced to complete and fill the IRS Form 5472 is the participation of a foreign entity in a USTB, involving any foreign company that has income derived from any economic activity in the United States. If that foreign company involved in a USTB makes a reportable transaction with a related party, either foreign or American, it must also be filed the IRS form 5472.
IRS Form 5472 penalties for non-submission or incomplete filing
Regarding a foreign shareholder, required to the filing and reporting transactions according to the IRS Forms 5472 rules, who does not file it or has filed it incompletely, may incur a penalty of USD 10,000.00 per year, in addition to presumably placing the company under the IRS target, with possible audits and follow-ups the next years.
This article is not intended to be legal advice, contact us and we may refer you to a qualified attorney who can give you the proper assistance according to your corporate and personal specific circumstances.