The Internal Revenue Service (IRS) of the United States of America has mandated a new filing requirement, known as Form 5472, for foreign shareholders of 25% or more in US LLCs. This form requests basic information on foreign owners’ citizenship and residence as well as the company’s transactions with foreign shareholders (exclusive of dividends). This information must be filed alongside the tax return for the fiscal year ending December 31, 2017. Individual shareholders (not the LLC as a whole) face stiff penalties for non-compliance. As discussed below, there are a few exceptions to the filing, as well as the option to dissolve an LLC before December 13, 2017. While this new IRS requirement is perhaps not surprising as tax regimes around the world move towards inter-jurisidictional global transparency, it must be said that this form is, fundamentally, a request for information that, as it stands now, will be kept confidential between the shareholder and the taxman. The IRS has not, at this time, indicated that there will be any publishing of private information or the creation of any kind of ownership registry, unlike in the United Kingdom for instance where recent legislation has led to a publicly searchable register of beneficial owners and “persons with significant control,” both foreign and domestic.
Form 5472 must be filed when a limited liability company has non U.S. shareholders who own at least 25% of the entity and the entity has a “reportable transaction” with any foreign shareholder. For the most part, a “reportable transaction” is any exchange of money or property with the foreign shareholder such as a payment for sales, rents, royalties, or interest but excludes the payment of dividends.
A separate Form 5472 must be filed on behalf of each 25% or more foreign shareholder. Conversely, no reporting is required if multiple foreign shareholders, in aggregate, own 25% of the LLC.
The Form requires that each 25% or more foreign shareholder provide his or her name, address, country of citizenship (or if the owner is a foreign company, the country where the entity is organized), the nature and amount of the reportable transaction with the foreign shareholder, the names and countries under whose laws the foreign shareholder files any income tax return as a resident, the names of the principal countries where that shareholder conducts business, and the total assets of the entity. Again, the IRS has not indicated that they have any intent to create a register of ownership or make any of this information available to the public.
The penalty for failure to file, or to file a considerably incomplete form, is $10,000 per year, per applicable shareholder. The penalty is imposed on each foreign shareholder of at least 25%, rather than on the LLC as a whole. Form 5472 should be filed simultaneously with the US entity’s income tax return for the fiscal year ending December 31, 2017.
Of course, with every new filing requirement there are exceptions. As such, no filing is required if:
- The LLC did not have a “reportable event”
- A US person controls the foreign related LLC and files Form 5471 (Information Return of US Persons with respect to Certain Foreign Corporations)
- The LLC qualifies as a foreign sales corporation
- The LLC does not have a permanent establishment in the US under an applicable income tax treaty and it filed Form 8833 (Treaty-Based Return Position Disclosure)
- The foreign corporation’s entire gross income is exempt from taxation and complies with Sections 883 (ships and aircraft exemption) and 887 (transportation exemption) of the US Tax Code.
- Both the reporting entity and related party are not US persons, as defined in the Tax Code and the transactions will not generate any US-source income
Foreign-owned LLCs may wish to terminate their US LLC on or before December 13, 2017 in order to avoid the filing. IBCF can help answer your questions about Form 5472 and assist with terminating your entity, if indicated. Please email us at firstname.lastname@example.org or call us: +1 845 398 0900. Alternatively you can fill out our contact form and one of our corporate specialists will be in touch.