In short, if your US company has a foreign owner or foreign shareholders then the company probably has to file form 5472 with the IRS. The US tax reform in December 2017 expanded the filing requirements and significantly increased the penalties for not filing or filing incorrectly. Therefore it’s important to understand who must file Form 5472 and how to do it.
Form 5472 is an Information Return that a 25% foreign-owned US Corporation or a Foreign Corporation engaged in a US Trade of Business must file. For foreign-owned US LLCs this was a new filing requirement starting in 2017.
When a foreign-owned US corporation must file Form 5472
Foreign-owned LLCs and C corps with at least 25% foreign shareholders or partners must file the information return Form 5472 for every year with reportable transactions. (More about reportable transactions below.)
The corporation, not the individual owner or shareholder, files this form. Any penalties would be assessed to the US corporation.
The form 5472 due date is April 15, together with your company’s Form 1120. If you file an extension for your corporate tax return, the Form 5472 is due together with the tax return on October 15.
A single-member foreign-owned LLC is a Disregarded Entity for tax purposes, meaning that all income flows through to the owner. For the purpose of Form 5472 however, the LLC must file Form 5472 together with a pro-forma Form 1120 (usually used for corporations) by the due dates listed above.
Although the LLC is considered a flow through entity for US tax purposes, other countries may consider it a default corporation. Some countries may tax owners/shareholders when money they withdraw from the LLC in the form of a dividend, salary or profit distribution. We work with trusted partners in many countries to help interpret these rules locally as well.
Penalties for not filing Form 5472
The new tax law substantially increased the penalties for not filing or filing something deemed substantially incomplete from $10,000 to $25,000 per year per form. The penalty also applies for failure to maintain the required records.
This is a major incentive to file and to do it correctly.
What if you haven’t file the form in past when you should have? Or suspect that you may have made mistakes when submitting, maybe inadvertently omitted something you didn’t know needed to be included? We can help you correct or catch up with your filings. As licensed CPAs we can represent clients in case of IRS pushback on these issues.
Reportable transactions for Form 5472
The foreign-owned company must list all reportable transactions on form 5472. Now, what are reportable transactions?
The IRS defines a “Reportable Transaction” very broadly. Basically, it includes any type of activity between a foreign owner and the US corporation, with no limit in value.
Examples of reportable transactions:
- The exchange of money or property, including payments, rental income, sales transactions, remuneration, commission payments, capital contributions and capital reductions
- The use of US company property, such as real estate, by a foreign owner or related party
- Loans and/or interest payments between the corporation and a foreign owner
To put this in layman’s terms, if you receive money from the LLC into your personal account, contribute money to the LLC (capital contributions), pay for an expense on behalf of the LLC (such as the franchise tax or registered agent fees) or have any transactions involving the LLC, you need to file 5472.
As mentioned earlier, the 2017 tax reform expanded the reporting requirements for foreign-owned US disregarded entities, basically foreign-owned US LLCs. Now you must also report any amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the LLC including contributions to and distributions from the LLC (Part V of the form). Furthermore, for this form you need to calculate the asset value at the end of the year.
How to file Form 5472
A foreign-owned LLC must first obtain an Employer Identification Number (EIN) to complete Form 5472. Unfortunately, you cannot e-file Form 5472. You must submit it by paper or fax.
The instructions for the form are rather complex and difficult to understand, even for native English speakers familiar with the US tax system. We help hundreds of foreign companies with their US tax filings every year. Our team speaks Spanish, Italian, Portuguese, Hindi, Swedish, Norwegian, Serbian, Bulgarian, Russian, and German. Contact us to get started with your US filings.