January 25, 2017
Updated March 11, 2020
New Rule for Foreign Owners of US LLCs
The IRS has issued a new regulation affecting foreign (non-US) individuals and entities which own “single member” US Limited Liability Companies (LLCs) that are classified as “disregarded entities”, (i.e. US LLCs which have one owner, and have not made an election to be taxed as a corporation).
For US international tax reporting purposes, new regulation section 301.7701-2(c)(2)(vi)(A) requires such LLCs to be treated as if they are US corporations. Thus, pursuant to IRC §6038A, the LLC is required to timely file Form 5472 for any year it has a “reportable transaction”, even if it is not otherwise required to file a US tax return. Failure to timely file could result in a penalty of $25,000 or more for each noncompliance. The US income tax status of the LLC is not changed – it remains a disregarded entity.
Among other transactions, “a reportable transaction” includes the following transactions with a related party - rental income, sales transactions, remuneration or commission payments, amounts loaned or borrowed, contributions, and transactions at less than fair market value.
Occasionally for business purposes, a non-US person will form a US LLC solely for the purpose of indicating a “presence” in the US to enhance its image with US customers, even though it has no actual presence in the US and its sole function is to sell to US customers from outside the US. This new regulation requires Form 5472 to be timely filed if the LLC has a loan or other “reportable transaction” with the owner or a related party. Similarly, if a single member US LLC is used to purchase US real estate which is occupied solely as a personal residence by the foreign owner, Form 5472 may be required for the purchase of the property, the sale of the property, a loan to the LLC, and possibly even to report personal use of the property. Form 5472 will generally also be required if a non-US person uses a single member LLC to own a US securities account.
The new regulation also applies to LLCs owned indirectly through one or more other disregarded entities. Thus, although residents of Canada usually do not own single member US LLCs directly because of a potential conflict with Canadian tax laws, some may inadvertently own them indirectly through grantor trusts, or even through Canadian Unlimited Liability Companies (ULCs).
The new rule is effective for tax years beginning after December 31, 2016 and ending on or after December 13, 2017 (or more likely December 31, 2017- see regulation section 1.6038A-1(n)). President Trump subsequently issued a moratorium/withdrawal/postponement with regard to new regulations but the foregoing does not seem to be affected.
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