Form 5472 is required for corporations that are involved with reportable transactions with a foreign party. A foreign party could be a corporation that is 25% owned by a foreign shareholder or a foreign corporation that is involved with a US trade or business.
What is Considered Foreign Owned?
What qualifies as 25% owned? Generally, a corporation that is 25% owned by a foreign shareholder could be required to file Form 5472 if:
- It is engaged in a trade with the U.S.
- It has a direct or indirect foreign shareholder (at least one) that is a 25% shareholder during the tax year.
- It or any part of it is created outside of the U.S. This includes partnerships and a company.
In addition to filing Form 1065, a partnership with foreign partners could also be responsible for filing other required forms such as Foreign Investment in Real Property Tax of 1980 (FIRPTA), Partnership Withholding, and Nonresident Alien Withholding.
The definition of a foreign person also needs to be clear and listed from the IRS perspective. A foreign person is an individual without citizenship or residency of the United States. This could be an individual who has ownership of something in the U.S. but is not a citizen. This can also be a trust or estate that is foreign. Various other aspects can be considered a foreign person or foreign transaction which would then put a corporation in need of form 5472. Be sure to read the IRS details of form 5472 if there is a question whether this form is needed for the tax year.
Form 5472 Requirements
Form 5472 requires the filer to disclose the foreign shareholders’ names, address 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?
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 between the foreign party and reporting corporation (paid or received) during that tax year. Some of these monetary transactions in Part IV on form 5472 (irs.gov) include areas such as: 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 (which have separate instructions), interest received, premiums received for insurance or reinsurance, purchases of stock in trade, purchases of tangible property, and the list goes on with about twenty seven items that need to be reviewed and reported if eligible. The items listed above plus the additional on form 5472 are all available through the IRS website. There are two links, one that provides the form and the other specific instructions, including reportable transactions. If you are writing down amounts and have foreign currency, write down the U.S. dollars and then attach the foreign exchange rates in a schedule.
Filing Deadlines for Form 5472
Form 5472 is filed with the U.S. Corporation’s federal income tax return, including any extensions of time to file same.
What’s New on Form 5472
The new regulations were updated by the IRS December of 2017. The new requirements refer to the corporations that are involved 25% or more with a foreign individual in the ways discussed above and on the IRS site that have reportable transactions with a related party will need the 1120 Corporate Income Tax Return with Form 5472. An updated checkbox on the first page will allow the filer to indicate the foreign owned U.S entity and an area for the reportable transactions to be reported with attachments if needed.
Going back to reportable transactions, the new regulations shall include amounts paid or received for areas such as the formation, dissolution, acquisition and disposition of the entity. Another area to include are the distributions and contributions made from the entity. U.S. disregarded entity with a foreign owner will be excluded from certain exceptions for recordkeeping.
Failure to File
Before a reporting corporation can file form 5472, they are required a U.S. FEIN as a taxpayer identification number. Be sure to check any numbers or applications needed for non-residents prior to filling out form 5472. Some applications can take several months. Filing this form on time is very important Failure to file on time, file complete or at all can result in penalties up to $10,000 per party, per year. Refer to the form 5472 instructions sheet for all details from the IRS to ensure everything is completed correctly and on time. Contact Brunoro Law to ensure this form is completed correctly and on time to avoid penalties and potential audits.