The IRS and Treasury department issued a new ruling on December 12, 2016, which is intended to create more financial transparency and reduce criminal activity (remember the “Panama Papers”?). The new regulations will create a mechanism whereby U.S. tax information will come to the attention of a foreign investor’s home country. This directly impacts reporting requirements for foreign owned single member LLCs.
For tax years beginning after January 1, 2017, domestic disregarded entities (e.g. single member LLCs) will be required to report and maintain records pursuant to Internal Revenue Code 6038A which previously only applied to 25% foreign owned domestic corporations.
Single member foreign owned entities will now be required to obtain a U.S. employer identification number (EIN) and to designate a “responsible party” (who is, in essence, the person that enables the “individual, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets”). The ruling also requires the filing of IRS Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, which reports certain transactions with related parties, including amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the entity, including contributions to and distributions from the entity.