CCH Tax Day Report
The Treasury Department and the IRS have released final regulations governing the treatment of domestic disregarded entities wholly owned by a foreign person for the limited purposes of the reporting, record maintenance and associated compliance requirements that apply to 25 percent foreign-owned domestic corporations under Code Sec. 6038A. The final rules adopt proposals found in NPRM REG-127199-15 (TAXDAY, 2016/05/09, I.1) with minor modifications.
The regulations are intended to strengthen financial transparency and thwart the use of companies to engage in illicit activities. The proposed regulations issued by the IRS require foreign-owned “disregarded entities,” including foreign-owned single-member limited liability companies (LLCs), to obtain an employer identification number (EIN) from the IRS. The Treasury Department explained that there is a narrow class of foreign-owned U.S. entities—typically, single member LLCs—that have no obligation to report information to the IRS or to get a tax identification number. According to the government, these “disregarded entities” can be used to shield the foreign owners of non-U.S. assets or non-U.S. bank accounts. By treating a domestic disregarded entity that is wholly owned by a foreign person as a domestic corporation separate from its owner (for these limited reporting and compliance requirements), the regulations would allow the IRS to determine whether there is any tax liability, and if so, how much, and to share information with other tax authorities.
The final regulations included three modifications from those proposed. First, the generally applicable exceptions to the requirements of Code Sec. 6038A are not intended to apply to a domestic disregarded entity that is wholly owned by a foreign person. As such, the final regulations provide that the exceptions generally applicable under Reg. §1.6038A-2(e)(3) and (4) —involving when (a) a reporting corporation is not required to file Form 5472 with respect to a related foreign corporation when a U.S. person that controls the related foreign corporation files a Form 5471 containing required information with respect to reportable transactions between the reporting corporation and the related foreign corporation for the taxable year, and (b) a reporting corporation is not required to file Form 5472 with respect to a related foreign corporation that qualifies as a foreign sales corporation for a taxable year for which the foreign sales corporation files Form 1120-FSC—are not applicable if the domestic corporation that is wholly owned by a foreign person.
In addition, the final regulations provide that the domestic reporting corporations must have the same tax year as their foreign owner if that foreign owner is required to fulfill a U.S. reporting obligation. If the foreign owner has no U.S. return filing obligation, then the domestic reporting corporation shall report on the calendar year basis.
The final regulations are effective December 13, 2016, and apply to tax years beginning on or after January 1, 2017, and ending on or after December 13, 2017. This is a change from the proposed regulations, which would have applied to tax years ending on or after the date that is 12 months after the date of publication in the Federal Register.
T.D. 9796, 2016FED ¶47,064
Code Sec. 6038A
CCH Reference – 2016FED ¶35,561
CCH Reference – 2016FED ¶35,561A
CCH Reference – 2016FED ¶35,561B
Code Sec. 7701
CCH Reference – 2016FED ¶43,082
Tax Research Consultant
CCH Reference – TRC FILEBUS: 9,322
CCH Reference – TRC FILEBUS: 9,324