What Is IRS Form 5472 Used For?
Historically, non-US parties have resisted making their records available to the IRS for tax purposes or have not maintained records sufficient to determine arm’s length transfer prices, due to no obligation for such a requirement in the internal revenue code. In response to this, Congress enacted the reporting requirements in its tax laws declaring that, each year, certain reporting corporations (the filer) must file IRS Form 5472, the Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, and maintain certain records.
The purpose of IRS Form 5472 is therefore to prevent base erosion and non-US parties from evading US taxes. The IRS wants to monitor US businesses that have foreign ownership or foreign businesses that do significant business within the US, and this form is one method of enforcing the tax laws and preventing base erosion. The form is used to disclose information about certain reportable transactions that occur with a foreign or domestic related party (part iii).
Form 5472 instructions are quite complex and difficult to understand.
This is especially true for a foreign shareholder of a US Corporation/Disregarded Entity.
Being a foreign entity doing business in the US can result in overwhelming tax filing requirements. For instance, a foreign-owned LLC needs to get an Employer Identification Number (EIN) and in order to file Form 5472 and Form 1120, your LLC is required to have an Employer Identification Number.
If you have an ITIN (Individual Taxpayer Identification Number) you can get an Employer Identification Number for your LLC online.
Failure to comply with the filing requirements can result in severe penalties. We recommend not to try and complete this form alone as the realm of international taxation is extremely complex, rather make contact with one of our international tax specialists to guide you on the US tax side. As we have all heard on tv before – “Please don’t try this at home folks”
Who Files Form 5472?
To fully understand who needs to file IRS Form 5472, we first need to define certain terms. In summary, only reporting corporations need to file IRS Form 5472.
Reporting Corporation – A 25% foreign-owned U.S. corporation (including a foreign-owned U.S. disregarded entity (part v) (Foreign-Owned U.S DE)), or
A foreign corporation engaged in a trade or business within the United States.
Foreign-owned U.S. corporation – A corporation is 25% foreign-owned if it has at least one direct or indirect 25% foreign shareholder at any time during the US tax year.
Foreign Shareholder – A foreign person is a 25% foreign shareholder if that foreign person owns, directly or indirectly, at least 25% of either the total voting power of all classes of stock entitled to vote, or the total value of all classes of stock of the corporation.
Foreign Person – Only foreign persons who meet the definition of the term “foreign person” are required to file the Form. The Internal Revenue Services stipulates that a foreign person includes:
- Individuals who are not U.S. citizens or residents of the United States;
- Individuals who are U.S. citizens or residents of a U.S. possession who is not otherwise a citizen or resident of the United States;
- Any partnership, association, company, or corporation that is not created or organized in the United States
- Any foreign estate or foreign trust described in section 7701(a)(31) of the internal revenue code; or
- Any foreign government (or agency or instrumentality thereof) to the extent that the foreign government is engaged in the conduct of a commercial activity as defined in section 892 of the internal revenue code.
The term “foreign person” does however not include any foreign person who consents to the filing of a joint income tax return.
A US corporation with 25% or more foreign ownership, or foreign corporations that do business or trade in the US are required to file the Form. All the related parties need to be reported in the form (part iii) and complete a separate form for each foreign owner. Additionally, if you are filing on behalf of a foreign-owned US company, you may also have to file Form 1120.
What Information Is Required?
Form 5472 should be used to provide information required under sections 6038A and 6038C when reportable transactions occur during the tax year of a reporting corporation with a foreign or domestic related party.
The reference to IRC 6038A is a specific section involving foreign ownership of certain U.S. and related business ownership. IRC 6038A stipulates the following:
“If, at any time during a taxable year, a corporation (hereinafter in this section referred to as the “reporting corporation”)—
(1) is a domestic corporation, and
(2) is 25-percent foreign-owned, such corporation shall furnish, at such time and in such manner as the Secretary shall by regulations prescribe, the information described in subsection
(b) and such corporation shall maintain (in the location, in the manner, and to the extent prescribed in regulations) such records as may be appropriate to determine the correct treatment of transactions with related parties as the Secretary shall by regulations prescribe (or shall cause another person to so maintain such records).”
IRC 6038C on the other hand refers specifically to foreign corporations engaged in US transactions.
“If a foreign corporation (hereinafter in this section referred to as the “reporting corporation”) is engaged in a trade or business within the United States at any time during a taxable year—
(1)such corporation shall furnish (at such time and in such manner as the Secretary shall by regulations prescribe) the information described in subsection (b), and
(2) such corporation shall maintain (at the location, in the manner, and to the extent prescribed in regulations) such records as may be appropriate to determine the liability of such corporation for tax under this title as the Secretary shall by regulations prescribe (or shall cause another person to so maintain such records).”
The form required the disclosure of the foreign shareholders’ name, address, country of citizenship, organization/incorporation, and the nature & amount of the reportable transaction with each foreign shareholder. An important note is that this form is not required where various foreign persons own 25% or more of the US company in aggregate, but rather where any one foreign person owns 25% or more of the US corporation.
How Long Does It Take To Prepare?
If you attempt to prepare this on your own, it could take hours or days and you run the risk of filling it in incorrectly.
Our trusted international tax advisors at Asena will be able to prepare this for you in a timely manner and without hassle, irrespective of the location of the foreign person/corporation or foreign trust.
Planning And Documentation
The rules in determining if you have a foreign related party are complex and you should carefully review your structure to ascertain your filing requirements for Form 5472.
With any complex international tax disclosure or filing requirements with the Internal Revenue Services, the best time to address the issues are at the time the transaction is being entered into and the tax compliance component should be part of the overall planning process.
Some examples of reportable transactions are:
- 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; and
- Loans and/or interest payments between the corporation and a foreign owner
Before the transaction is entered into, the transfer pricing rationale and relationship between the parties should be well documented. Subsequent to the completion of the transaction, the terms of the related party transaction should be closely monitored, and you should ensure that proper records and documentation is maintained. Prevention is better than cure and ensuring that all your records are up to date and maintained will minimize the risk of an audit from the Internal Revenue Services or penalties.
Exceptions From Filing Form 5472
The IRS states that a reporting corporation is not required to file the Form if any of the following apply:
- The reporting corporation had no reportable transactions of the types listed in Parts IV and VI of the form.
- A U.S. person that controls the foreign related corporation files Form 5471 for the tax year to report information under section 6038. To qualify for this exception, the U.S. person must complete Schedule M of Form 5471showing all reportable transactions between the reporting corporation and the related party for the tax year. It’s further important to note that this reporting requirements exception does not apply to foreign-owned U.S. DE (disregarded entities).
- The related corporation qualifies as a foreign sales corporation for the tax year and files Form 1120-FSC. This exception also does not apply to foreign-owned U.S. disregarded entities.
- It is a foreign corporation that does not have a permanent establishment in the United States under an applicable income tax treaty and timely files Form 8833.
- It is a foreign corporation whose gross income is exempt from taxation under section 883 and it timely and fully complies with the reporting requirements of sections 883 and 887.
- Both the reporting corporation and the related party are not U.S. persons as defined in section 7701(a)(30) and the transactions will not generate in any tax year:
- Gross income from sources within the United States or income effectively connected, or treated as effectively connected, with the conduct of a trade or business within the United States; or
- Any expense, loss, or other deduction that is allocable or apportionable to such income.”
Penalties For Not Filing Form 5472
If you fail to file the Form when due and, in the manner, prescribed, a penalty of $ 25 000 will be assessed on any reporting corporation. This penalty also applies for the failure to maintain records as required by CFR § 1.6038A-3.
Each member of a group of corporations filing a consolidated information return is a separate reporting corporation subject to a separate $25,000 penalty and each member is jointly and severally liable. If the failure continues for more than 90 days after notification by the IRS, an additional penalty of $25,000 will apply. Hence why it’s advisable to make use of professionals to assist you.
This penalty applies with respect to each related party for which a failure occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period ends.”
Reasonable Cause For 5472 Penalty Abatement
If a person has reasonable cause for the late, incomplete or failure to file the Form, they may be able to avoid the fines and penalties associated with it. So, if you are late and need to file the Form, you could get your penalties abated (reduced) if there is ‘reasonable cause’. If your non U.S. LLC makes $ 20 million or less and has a limited presence in the US, the IRS is usually more flexible.
When Is It Due And Where Should It Be Filed?
Due to Form 5472 being sent to the IRS as a separate form with Form 1120, the Form 1120 due dates apply to both separate forms/tax forms. For LLCs that operate on the calendar year, Form 5472 and Form 1120 are due by the 15th of April each year. However, if the non U.S. LLC operates on a different fiscal year, please refer to Form 1120 instructions and refer to the “When to File” section.
A foreign-owned US Disregarded Entity is required to file a pro forma Form 1120 with Form 5472 attached by the due date, even though it has no income tax return requirement as a result of the final regulations under section 6038A. The only information required to be completed on Form 1120 is the name and address of the foreign-owned U.S. DE and items B and E on the first page. The foreign-owned U.S. DE has the same tax year used by its owner for U.S. tax filing requirements or, if none, the calendar year should be used. Foreign-owned U.S. DEs are required to use the special mailing address and should not use the mailing addresses provided in the instructions for Form 1120. These mailing addresses are –
Fax (300 DPI or higher) to 855-887-7737, or
Internal Revenue Service
1973 Rulon White Blvd
M/S 6112 Attn: PIN Unit
Ogden, Utah 84201
If you file your income tax return electronically, see the instructions for your income tax return for general information about electronic filing.
Extension Of 5472 Due Date
If you require more time to file Form 5472, you can request an extension by filing Form 7004 and this will extend the due date to file for 6 months. So until the 15th of October. This is however not an extension to pay any taxes owed. It is only an extension to file the paperwork. If your due date is the 15th of April, then Form 7004 must also be postmarked 15th of April.
Related Party Rules Under Form 5472
Reportable transactions only happen between related parties and, hence, where base erosion is prevalent. The related party rules are complex and generally means that certain persons (individuals or entities) may be attributed ownership (attribution) of a company that they do not directly own. Another term used for this is ‘constructive ownership’.
The IRS defines a related as:
“A related party is:
– Any direct or indirect 25% foreign shareholder of the reporting corporation
– Any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the reporting corporation
– Any person who is related (within the meaning of section 267(b) or 707(b)(1)) to a 25% foreign shareholder of the reporting corporation, or
– Any other person who is related to the reporting corporation within the meaning of section 482 and the related regulations. “Related party” does not include any corporation filing a consolidated federal income tax return with the reporting corporation.”
Multiple Forms 5472 For Multiple Related Parties
If your LLC has reportable transactions with more than one related party (domestic related party or foreign related party), you will need to file a Form 5472 for each related party.
Direct And Indirect Ownership
Determining direct, indirect, and constructive ownership can be quite tricky.
A foreign person is a direct 25% foreign shareholder if it owns directly at least 25% of the stock of the reporting corporation by vote or value.
An ultimate indirect 25% foreign shareholder is a 25% foreign shareholder whose ownership of stock of the reporting corporation is not attributed (under the principles of sections 958(a)(1) and (2)) to any other 25% foreign shareholder.
An example of how indirect ownership could apply – non-US individual (A) owns 10% of US Corporation (B), however another US business (C) that A is related to own 15% of B, then A might be considered the owner of those 15% shares, which will in turn cause B to be 25% foreign-owned.
Reportable Transactions For Form 5472
The IRS specifies which specific transactions are reportable:
“A reportable transaction is:
– Any type of transaction listed in Part IV (for example, sales, rents, etc.) for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year; or
– Any transaction or group of transactions listed in Part IV, if:
– Any part of the consideration paid or received was non-monetary consideration, or
– Less than full consideration was paid or received. Transactions with a U.S. related party, however, are not required to be specifically identified in Part IV and VI.”
The IRS has tax treaties with over 60 countries. This means the governments of those countries agree to share information about their tax citizens in order to better collect tax revenue.
The requirement to file Form 5472 should not be taken lightly. The United States Treasury Department spends billions of dollars enforcing its laws on those that have filing requirements in the U.S.
The main difference is that Form 5471 is filed by a U.S. taxpayer, while Form 5472 is filed by any foreign company/non-US entity engaged in a U.S. trade or business activity or a U.S. company that is 25% foreign-owned.