In the tech world we currently live in, the internet has almost eliminated country boundaries and has allowed foreign business to sell their products and goods all over the globe. Also, the easy access and globalization has led a multitude of entrepreneurs to leave the comfort of their homes and their countries to bring their products and services to the United States.
Starting a business in the US has several legal and tax implications, which foreign business owners must be aware of. Besides the regular forms every US business must file with the IRS, those with foreign owners have additional filing requirements.
Form 5472 is an information return that must be filed by a US corporation that is 25% owned by a foreign shareholder or a foreign corporation that is involved in a US trade or business, if, and only if, the US Corporation has had a “reportable transaction.”
Who Must File Form 5472?
Form 5472 must be filed by either 1) a US Corporation that is 25% (or more) owned by a foreign shareholder or 2) a foreign corporation that is engaged in a US trade or business. A corporation is 25% foreign owned if it is directly, indirectly or constructively owned by a foreign person.
A foreign person is an individual without citizenship or legal permanent residency of the United States. It could also be a foreign business (i.e., created and organized outside of the US), a foreign trust or a foreign estate.
Determining direct, indirect and constructive ownership can be a complicated matter. For example, if you – a foreign individual – own 10% of a US Corporation and another US business that you are related to own 15% of the same US Corporation, then you might be considered the owner of those 15% shares, which will in turn cause the US Corporation to be 25% foreign-owned. Be sure to talk to an experienced international tax attorney to discuss indirect and constructive ownership rules that could affect your business.
Form 5472 Requirements
Form 5472 requires the filer to disclose the foreign shareholders’ names, addresses and country of citizenship, organization or incorporation, principal business activity and details on the transactions with each foreign shareholder.
What is a Reportable Transaction for Form 5472?
Not all US corporations that are 25% foreign-owned or foreign businesses engaged in a US trade or business are required to file Form 5472. Only those businesses with “reportable transactions” are required to file Form 5472.
What is considered a foreign transaction or a reportable transaction?
A reportable transaction is listed on Form 5472 in Part IV and is a monetary transaction (paid or received) between the foreign party and reporting corporation during that tax year. Some of these include: sales of stock in trade, sales of tangible property other than stock, platform contribution transaction payments received, cost sharing transaction payments received, rents received, royalties received, sales, leases, licenses of intangible property rights (things such as patents, trademarks etc), technical, managerial, engineering, construction, scientific or like services, commissions received, amounts borrowed, interest received, premiums received for insurance or reinsurance, purchases of stock in trade, purchases of tangible property, among others. Be sure to check the instructions for Form 5472 (https://www.irs.gov/pub/irs-pdf/i5472.pdf) and talk to your tax professional and tax advisor to determine if you have any reportable transactions that need to be disclosed on Form 5472.
Filing Deadlines for Form 5472
Form 5472 is filed with the U.S. Corporation’s federal income tax return (1120) or with the Foreign entity’s return (1120-F), including any extensions.
What’s New on Form 5472
The new regulations were updated by the IRS in December of 2017. They extend the filing requirements of Form 5472 to include foreign-owned disregarded entities. A US disregarded entity is one (usually, a single-member LLC) that has no income tax return filing of your own. The foreign owner must file a pro forma Form 1120 with Form 5472 attached to it to report any reportable transactions it had with the US entity.
Failure to File
As with any other information return, it is very important to file Form 5472 timely and correctly. Failure to file or filing an incomplete or incorrect return can result in a penalty of $25,000 on the reporting corporation (or disregarded entity). An additional $25,000 penalty can also be imposed if the reporting entity does not file Form 5472 after it has been notified by the IRS. Besides monetary penalties, criminal penalties may also be applied.
If you were required to file Form 5472 and have failed to do so, the tax professionals at Brunoro Law can assist you determine if you could file a delinquent Form 5472 and request a penalty abatement or if you qualify under the Streamlined Domestic/Foreign Offshore Procedures.
Being a foreign shareholder of a US Corporation/Disregarded Entity or being a foreign entity doing business in the US can result in overwhelming tax filing requirements. Failure to comply with such requirements can result in severe penalties. Do not try to navigate the complicated realm of international taxation alone. Call us today to assist you determine your filing requirements or to assist you become compliant with all US tax laws.