Posted on February 13, 2017 by Andrew Goodrich
In mid-December 2016, the U.S. Treasury Department issued final regulations affecting all foreign-owned single-member limited liability companies. While these regulations have the potential to increase transparency with respect to the movement of foreign funds, they impose new burdens on the foreign owners of U.S. LLCs.
Prior to these final regulations going into effect, the ownership of LLCs by foreign persons was often opaque to taxing authorities. Most of the time, single-member LLCs (whether owned by foreign or domestic persons) are treated as disregarded entities for tax purposes, meaning any income is reported on the tax returns of the LLC owners themselves rather than the LLC. Consequently, the disregarded entities are usually not subject to US tax reporting requirements. Generally speaking, an entity that is not subject to tax filing does not have to obtain an employer identification number (“EIN”), meaning that the owner of that entity does not need to identify himself or herself on the Form SS-4, required to obtain the EIN.
These new final regulations change the treatment of disregarded entities owned by foreign persons from that of a typical disregarded entity to that of a domestic corporation. Consequently, these entities are now subject to certain additional requirements, just as though they were a 25% foreign-owned U.S. corporation. Most notably, these requirements include filing an annual return (Form 5472), and maintaining more substantial record keeping with respect to certain transactions. These requirements apply even in situations where the foreign-owned LLC has no reportable transactions and no U.S. assets or income.
Violations for failure to fulfill these new requirements can be substantial, including a $10,000 penalty against the foreign-owned LLC for each violation. The regulations apply to tax years beginning on or after January 1, 2017 and ending on or after December 13, 2017.
Some commentators have suggested that these new rules are intended primarily to assist other countries in the enforcement of their laws. It is unclear at this point how aggressive the IRS will be in enforcing these new regulations, but foreign-owned U.S. LLCs should consider whether and how these new rules will impact their operations and reporting processes.