The Department of the Treasury and the IRS recently released final regulations (T.D. 9796) that treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation separate from its owner. Such treatment applies for information reporting, record maintenance and associated compliance requirements that otherwise apply to 25% foreign-owned domestic corporations under Section 6038A.
In addition to other requirements, the final regulations require a domestic disregarded entity wholly owned by a foreign person to file Form 5472, "Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business," reporting transactions that would have been regarded under general U.S. federal tax principles if the entity had been regarded as a corporation for U.S. federal tax purposes.
The final regulations largely adopted the proposed regulations (REG-127199-15) released in May 2016 but also include a limited number of changes. These changes are highlighted below. For a general overview of the rules, read Grant Thornton LLP's previous coverage on the May 2016 proposed regulations here.
According to the preamble, the government intended the generally applicable exceptions to the requirements of Section 6038A would not apply to a domestic disregarded entity that is wholly owned by a foreign person. Accordingly, the proposed regulations provided that certain exceptions to the record maintenance requirement afforded to small corporations and for de minimis transactions would not apply to a domestic disregarded entity that is wholly owned by a foreign person.
The final regulations expanded the scope of the proposed regulations by removing additional exceptions that would have otherwise exempted a domestic disregarded entity that is wholly owned by a foreign person from complying with reporting requirements under certain circumstances. Under the existing regulations for foreign-owned domestic corporations, a reporting corporation is not required to file Form 5472 where: a U.S. person that controls the foreign related corporation files a Form 5471, "Information Return of U.S. Persons With Respect to Certain Foreign Corporations," containing required information with respect to reportable transactions between the reporting corporation and the related foreign corporation for the taxable year (Treas. Reg. Sec. 1.6038A-2(e)(3)), or the related foreign corporation qualifies as a foreign sales corporation for a taxable year and files Form 1120-FSC, "U.S. Income Tax Return of a Foreign Sales Corporation" (Treas. Reg. Sec. 1.6038A-2(e)(4)). The final regulations, however, apply to a domestic disregarded entity that is wholly owned by a foreign person without regard to these exceptions generally applicable under Treas. Reg. Secs. 1.6038A-2(e)(3) and (4).
The second change provides that reporting corporations will have the same taxable year as their foreign owner if the foreign owner has a U.S. return filing obligation. If the foreign owner has no U.S. return filing obligation, then the taxable year of the reporting corporation is the calendar year unless otherwise provided in forms, instructions or other published guidance.
The final change in the regulations was to the applicability date. The final regulations apply to taxable years of entities beginning on or after Jan. 1, 2017, and ending on or after Dec. 13, 2017. The proposed regulations would have applied to taxable years ending on or after the date that is 12 months after the date of publication of the final regulations in the Federal Register, without regard to the date on which the taxable year began.
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