New reporting requirements for foreign-owned U.S. disregarded entities.

• Author: Hayes, Brian

On Dec. 12, 2016, the IRS issued final regulations (T.D. 9796) that treat a domestic disregarded entity that is wholly owned by a foreign person as a domestic corporation separate from its owner for reporting, recordkeeping, and compliance purposes under Sees. 6038A and 7701. The regulations serve to provide the IRS with additional information needed to satisfy its obligations under tax treaties and information exchange agreements.

Prior to the issuance of these regulations, the entity classification election regulations would have treated this type of entity as disregarded from its owner (other than for employment and excise taxes) unless an election was made to treat it as a corporation for U.S. tax purposes. Therefore, this type of entity, generally, would not have had separate income tax or information-reporting requirements because its assets and liabilities were treated as belonging to its sole owner outside the United States. In addition to the new annual reporting requirement, the new regulations require a foreign-owned U.S. disregarded entity to apply for a federal employer identification number and retain permanent records regarding related-party transactions.

The final regulations amend Regs. Sec. 301.7701-2(c), adding a special rule that treats any domestic disregarded entity that is wholly owned (directly or indirectly) by one foreign person as a domestic corporation separate from its owner for purposes of reporting and record maintenance under Sec. 6038A. Under Sec. 6038A and Regs. Sees. 1.6038A-1 and 1.6038A-2, a domestic corporation that is 25% foreign-owned must maintain records regarding its transactions with related parties and submit information to the IRS on an annually filed information return, Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. For these purposes, a related party is considered to be any direct or indirect 25% foreign shareholder; any person who is related to the reporting corporation or 25% foreign shareholder under the rules of Sec. 267(b) or Sec. 707(b)(1); or any other person related to the reporting corporation under Sec. 482 and the related regulations.

The final regulations provide additional guidance regarding some of the compliance matters associated with this new reporting rule. If the foreign owner already has a U.S. tax return filing obligation, the tax year of the reporting corporation is the same as the tax...