New reporting requirements for non-American owners of LLCs

Matthew Pannell:
Phone: +44 (0) 20 7833 3500
Date: Fri, June 02, 2017

Despite the IRS’s attitude to disclosure of foreign assets by US citizens and the arguably heavy handed approach applied by the Foreign Account Tax Compliance Act (FATCA), the US itself has historically been reluctant to offer any level of reciprocity to foreign governments.  Whilst the rest of the developed world, including all the major tax havens, are establishing a Common Reporting Standard (CRS) for sharing information across borders, the US remain reluctant to sign up.

In fact, the lack of any public record of ownership for US Limited Liability Companies (LLCs) and any requirement to disclose such ownership to the US authorities has led to the LLC becoming an entity of choice for non-American individuals looking to disguise ownership of assets in a post-banking secrecy world.

The tax transparent nature of the LLC, which applies by default, has further increased the attractiveness of these entities for foreigners. Until now, this transparency has meant no US Corporation Tax return was required and, so long as no US income is generated, the owners too are excluded from filing individual returns.

This situation changed recently with the publication of new regulations widening the reporting requirements for Form 5472.  Under the new regulations, a Form 5472 filing must now be made by a transparent LLC if wholly owned by a non-American. The form must include the following information:

  1. The name, principal place of business, nature of business, and country or countries in which organized or resident, of each person which:
    (a) is a related party to the reporting corporation, and
    (b) had any transaction with the reporting corporation during its taxable year;
  2. The manner in which the reporting corporation is related to each person referred to in paragraph (1), and
  3. Transactions between the reporting corporation and each foreign person which is a related party to the reporting corporation.

The preamble to the new regulations gives some insight into what the IRS are hoping to achieve with their newfound understanding of these structures and states that “this information will enhance the United States’ compliance with international standards of transparency and exchange of information for tax purposes and strengthen the enforcement of U.S. tax laws.” This is a clear indication that the US authorities expect to share these details with foreign tax agencies despite their historic reluctance to commit to the international information sharing standards established under CRS.

We await further guidance from the IRS on the logistics associated with filing the new form, including whether it will be fileable online and whether it can be filed as a stand-alone form or attached to a Corporation Tax return of some kind. What is clear is that the filing will apply with effect from the 2017 tax year with the first returns due in 2018. The penalty for failure to file will be $10,000 per entity, per year.

Any non-Americans who hold an interest in a US LLC, whether directly or indirectly, should consider their requirements under the new legislation. There may be scope to avoid the reporting where the structures are wound up before 31 December 2017 but the dissolution of these entities could create tax issues in itself, both in the US and the owner’s jurisdiction of residence and advice should be sought accordingly.

If you have any questions related to this article please contact your usual Frank Hirth advisor.

This article has been written for the general interest of our clients and contacts to stimulate further thought and enquiry. It does not contain answers to specific situations and it is therefore essential to treat it as a prompt to take specific advice on any real and particular issues. We believe that the facts as summarised in this article are correct as at the time of going to press in June 2017. If we discover that the article might be read in a way that conveys a misleading impression (whether by tone, content, error or omission) we will make the necessary changes and draw attention to what has been changed once we become aware of the need to do so. We will not be responsible for any action taken by a reader who relies on the article but does not seek further advice to answer any specific query.

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