Beginning January 1, 2017, foreign-owned single member LLCs—disregarded entities commonly used to invest in U.S. real estate—will have increased reporting and record keeping requirements.
The New Regulations
In an effort to improve compliance and transparency, newly finalized regulations will treat a domestic disregarded entity wholly owned by a foreign person as a domestic corporation separate from its owner for the limited purposes of the reporting, record maintenance and associated compliance requirements that apply to 25 percent foreign-owned domestic corporations under IRC § 6038A.
Reporting Requirements Under IRC § 6038A
Under IRC § 6038A, 25 percent foreign-owned domestic corporations must report the name, principal place of business, nature of business, and country or countries in which organized or resident, of related parties with which the corporation had any transactions during the year. This information is reported on a Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) attached to the corporation’s tax return.
What This Means for the Foreign Investor
Under the new reporting regime, foreign investors using disregarded entities will need to file a Form 5472 for any reportable transactions, and therefore must obtain an Employer Identification Number in order to file the form and also maintain records sufficient to establish both the accuracy of the form and the correct U.S. tax treatment of such transactions.
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