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Abracadabra! The IRS Proposes Rules that Bring into Plain View U.S. Disregarded Entities with Foreign Owners

By Anthony P. Daddino on June 9, 2016

The IRS is seeking to shine the light on domestic disregarded entities with foreign owners. Under regulations proposed last month, a U.S. disregarded entity that is wholly owned by a foreign person would be treated as a domestic corporation separate from its owner for reporting and record maintenance requirements under IRC Section 6038A. Practically this means that U.S. disregarded entities that are foreign owned would now be required to (i) obtain an EIN from the IRS by filing a Form SS-4 that includes certain responsible party information, and (ii) file a Form 5472 information return disclosing ownership details and reporting transactions between the disregarded entity and its foreign owner or other foreign related parties. Significantly, under these proposed regulations, contributions and distributions – treated as tax nothings for income tax purposes since the entity is disregarded as separate from its foreign owner – would nonetheless be transactions required to be reported to the IRS. To review the newly proposed regulations, follow this link: https://www.irs.gov/irb/2016-21_IRB/ar19.html.

If you have any questions about these new proposed rules, or would like to discuss how these rules might apply to your non-U.S. clients and their U.S. business interests, please do not hesitate to contact Anthony Daddino at (214) 749-2464.