The Department of the Treasury and the IRS recently released final regulations (T.D. 9796
) that treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation separate from its owner. Such treatment applies for information reporting, record maintenance and associated compliance requirements that otherwise apply to 25% foreign-owned domestic corporations under Section 6038A.
In addition to other requirements, the final regulations require a domestic disregarded entity wholly owned by a foreign person to file Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business,” reporting transactions that would have been regarded under general U.S. federal tax principles if the entity had been regarded as a corporation for U.S. federal tax purposes.
The final regulations largely adopted the proposed regulations (REG-127199-15
) released in May 2016 but also include a limited number of changes. These changes are highlighted below. For a general overview of the rules, read Grant Thornton LLP’s previous coverage on the May 2016 proposed regulations here
According to the preamble, the government intended the generally applicable exceptions to the requirements of Section 6038A would not apply to a domestic disregarded entity that is wholly owned by a foreign person. Accordingly, the proposed regulations provided that certain exceptions to the record maintenance requirement afforded to small corporations and for de minimis transactions would not apply to a domestic disregarded entity that is wholly owned by a foreign person.
The final regulations expanded the scope of the proposed regulations by removing additional exceptions that would have otherwise exempted a domestic disregarded entity that is wholly owned by a foreign person from complying with reporting requirements under certain circumstances. Under the existing regulations for foreign-owned domestic corporations, a reporting corporation is not required to file Form 5472 where: a U.S. person that controls the foreign related corporation files a Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” containing required information with respect to reportable transactions between the reporting corporation and the related foreign corporation for the taxable year (Treas. Reg. Sec. 1.6038A-2(e)(3)), or the related foreign corporation qualifies as a foreign sales corporation for a taxable year and files Form 1120-FSC, “U.S. Income Tax Return of a Foreign Sales Corporation” (Treas. Reg. Sec. 1.6038A-2(e)(4)). The final regulations, however, apply to a domestic disregarded entity that is wholly owned by a foreign person without regard to these exceptions generally applicable under Treas. Reg. Secs. 1.6038A-2(e)(3) and (4).
The second change provides that reporting corporations will have the same taxable year as their foreign owner if the foreign owner has a U.S. return filing obligation. If the foreign owner has no U.S. return filing obligation, then the taxable year of the reporting corporation is the calendar year unless otherwise provided in forms, instructions or other published guidance.
The final change in the regulations was to the applicability date. The final regulations apply to taxable years of entities beginning on or after Jan. 1, 2017, and ending on or after Dec. 13, 2017. The proposed regulations would have applied to taxable years ending on or after the date that is 12 months after the date of publication of the final regulations in the Federal Register, without regard to the date on which the taxable year began.
Partner, Washington National Tax Office
+1 202 861 4104
Experience Manager, Washington National Tax Office
+1 202 521 1509
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.