The Treasury Department and the Internal Revenue Service recently released final regulations governing the treatment of domestic disregarded entities (DREs) that are owned by a foreign person. The regulations are intended to increase transparency, improve access to information, and strengthen the enforcement of U.S. tax laws.
DREs are commonly used to provide anonymity for foreign owners of non U.S. assets held in U.S. accounts. Prior to the final regulations, a DRE, wholly owned by a foreign person, was not required to obtain an employer identification number or file a U.S. information return, making it possible to conceal assets within the U.S. The final regulations require foreign-owned DREs 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 (Under Sections 6038A and 6038C of the Internal Revenue Code) to disclose the identity of the foreign owners, to report certain related-party transactions (which would require obtaining an Employer Identification Number), and to comply with related record maintenance requirements. Treating a domestic DRE that is exclusively owned by a foreign person as a domestic corporation separate from its owner allows the IRS to meet international information exchange standards with other tax authorities.
The regulations provide that the domestic reporting corporations must have the same tax year as the foreign owner if the foreign owner is required to fulfill a U.S. reporting obligation. If the foreign owner has no U.S. reporting obligation, the domestic reporting corporation will 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.
If you would like more information on how these updates may affect you, please contact your Arthur Bell advisor at 855-787-0001 or via email at email@example.com