United States: Disregarded Entity Regs Confirm Global Transparency Push

Last Updated: May 24 2017
Article by Jonathan E. Gopman, Sanford J. Davis and Alexandre M. Denault

Last year, the Treasury Department proposed new reporting requirements for domestic disregarded entities with one foreign owner. The proposed regulations, issued May 10, 2016, greatly expanded the scope of Section 6038A of the 1986 Internal Revenue Code. As of Dec. 13, 2016, the Treasury adopted most of them in its final rules.

Consistent with the preamble to the proposed regulations, the primary purpose of the final regulations remains to enable the Treasury Department to collect information about taxpayers, which it can then exchange with other governments under tax treaties, taxpayer information exchange agreements and other inter-governmental agreements. The U.S. government also intends to use this information to enforce the U.S. tax laws, as well as to prevent money laundering and similar activities.

The focus of the final regulations is on reporting for domestic disregarded entities. A "disregarded entity" is a company (other than a corporation formed under state law) with a single owner that is not treated as an entity separate from its owner for United States federal tax purposes.

In other words, a disregarded entity is generally nonexistent from a substantive U.S. federal tax perspective.1 A single-member limited liability company formed under U.S. state law is classified by default (e.g., no election of corporate status is made) as a disregarded entity.2

Prior to the final regulations, a domestic disregarded entity with a single foreign owner often had no tax reporting obligation to the Internal Revenue Service.

Reporting Obligations in General

Section 6038A requires a domestic corporation which is at least 25 percent foreign-owned to furnish certain information to the IRS with regard to reportable transactions.3

The regulations extend this obligation to a foreign, non-U.S. corporation that is 25 percent foreign-owned and engaged in trade or business within the United States.4 Attribution rules apply to determine whether a person owns such portion of a corporation.5

In the above instances, reportable information includes the name, principal place of business, nature of business, country of organization or residency of each foreign person that is a related party and had a reportable transaction with the corporation during its taxable year, and information about reportable transactions.6

Related parties include any shareholder who owns 25 percent or more of the voting power or value of the corporation (also based on ownership attribution rules).7 Reportable transactions include transactions such as sales of certain types of property, payments of commissions and loans.8

Information required to be reported under Section 6038A must be furnished to the IRS annually on Form 5472, Information Return of a 25 Percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code).9

These corporations are also required to maintain books and records that are sufficient to establish the accuracy of the information.10 A monetary penalty of $10,000 may be assessed on any corporation that fails to file Form 5472 when due, or that fails to maintain the required books and records.11

Criminal penalties may also apply for failure to submit the required information or for filing false or fraudulent information.12

Proposed Regulations

The proposed regulations extended information reporting under Section 6038A to domestic disregarded entities with a single foreign owner by employing a fiction that treats such disregarded entities as domestic corporations for this limited purpose13

In addition, the Treasury also proposed to expand the category of reportable transactions applicable to these domestic disregarded entities to include "any sale, assignment, lease, license, loan, advance, contribution, or any other transfer of any interest in or a right to use any property (whether tangible or intangible, real or personal) or money, however such transaction is effected, and whether or not the terms of such transaction are formally documented."14

Hence, under the proposed regulations, a foreign person's contributions to, and distributions from, a domestic disregarded entity would be reportable transactions, even though such events would not otherwise be treated as a transaction for tax purposes and transfer pricing rules would not apply.15

Under the proposed regulations, a domestic disregarded entity with a single foreign owner that has a reportable transaction would be required to apply for and obtain an Employer Identification Number for purposes of satisfying its reporting obligations on Form 5472. The proposed regulations provided the exceptions from the record maintenance requirements for small corporations and de minimis transactions would not apply to domestic disregarded entities.

Final Regulations

The Treasury's final regulations leave unchanged nearly all of the substantive provisions of the proposed regulations, while adding several important modifications.

First, they specifically provide that two of the exceptions from Form 5472 filings for corporations which are contained in Treas. Reg. 1.6038A-2(e)(3) (based on an overlap with Form 5471 reporting) and Treas. Reg. 1.6038A-2(e)(4) (based on foreign sales corporation reporting on Form 1120-FSC) shall not apply with regard to a domestic disregarded entity that is treated as a domestic corporation under Section 6038A.16

Second, the final regulations provide that the taxable year of a domestic disregarded entity subject to Section 6038A will be the same as the taxable year of its sole foreign owner if such foreign owner has a U.S. income tax or information filing obligation for its taxable year.17 If the foreign owner does not have a U.S. income tax or information filing obligation for such taxable year, the taxable year of the domestic disregarded entity will be the calendar year unless otherwise published in forms, instructions or other guidance. The Treasury added these provisions to facilitate compliance with Section 6038A and for ease of tax administration.

Third, the final regulations also now specify how amounts loaned and borrowed are to be reported, providing that such amounts shall be "reported as monthly averages or outstanding balances at the beginning and end of the taxable year, as the form shall prescribe. ..."18 This change applies to both traditional corporations as well as domestic disregarded entities treated as domestic corporations under Section 6038A.

In addition, the final regulations further tighten Section 6038A reporting for domestic disregarded entities by shutting off the exclusion for reportable transaction reporting that generally would be available if neither party to the transaction is a U.S. person and the transaction will not generate U.S. source income, income effectively connected with a U.S. trade or business, or an expense allocable to such income.19

Lastly, the final regulations apply to taxable years of such entities beginning after Dec. 31, 2016 and ending on or after Dec. 31, 2017.20


The final regulations notably take Section 6038A reporting to a more rigorous standard than their proposed version in several important respects. Further, they impose a higher reporting standard on domestic disregarded entities, as compared to reporting of foreign-owned corporations and foreign corporations engaged in a U.S. trade or business, which were the original targets of Section 6038A.

The Treasury Department reported that it did not receive a single written comment to its proposed regulations and, as a result, no public hearing was requested or held. It is thus not surprising that the agency's final regulations carry forward nearly all the provisions from its former proposal, in nearly identical language.

The new additions and changes serve mainly to clarify how reporting is to be performed and reinforce the overarching substance of the reporting regime. The latter requires tax and non-tax practitioners to seek appropriate guidance to address this new reporting framework.


1. One notable exception is for employment tax purposes. Treas. Reg. 301.7701-2(c)(iv).

2. Treas. Reg. 301.7701-3.

3. Code Section 6038A.

4. Treas. Reg. 1.6038A-1(c)(1).

5. Code Section 6038A(c)(5); Treas. Reg. 1.6038A-1(e).

6. Treas. Reg. 1.6038A-2(b).

7. Treas. Reg. 1.6038A-1(d); Code Section 6038A(c)(5); Treas. Reg. 1.6038A-1(e).

8. Treas. Reg. 1.6038A-2(b).

9. Treas. Reg. 1.6038A-2(a).

10. Treas. Reg. 1.6038A-3.

11. Treas. Reg. 1.6038A-4(a).

12. Treas. Reg. 1.6038A-4(e).

13. Prop. Reg. 301.7701-2(c)(2)(vi); Prop. Reg. 1.6038A-1(c)(1).

14. Prop. Reg. 1.6038A-2(b)(3)(xi).

15. Prop. Reg. 1.6038A-2(b)(9).

16. Treas. Reg. 1.6038A-2(e)(3) and (4).

17. Treas. Reg. 301.7701-2(c)(2)(iv)(C).

18. Treas. Reg. 1.6038A-2(b)(3)(vii).

19. Treas. Reg. 1.6038A-2(a)(2).

20. Treas. Reg. 1.6038A-1(n).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions