US Inbound: Domestic disregarded entities: New reporting rules

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US Inbound: Domestic disregarded entities: New reporting rules

Fuller-James
Forst-David

Jim Fuller

David Forst

Changes to reporting rules in the US are intended to provide the Internal Revenue Service (IRS) with improved access to information that it needs to satisfy its obligations under US tax treaties, tax information exchange agreements (TIEAs) and similar international conventions, as well as to strengthen the enforcement of US tax laws.

In December 2016, the Treasury and IRS finalised regulations that treat a domestic disregarded entity (DRE) 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% foreign-owned domestic corporations under § 6038A. The regulations amended Treas. Reg. § 301.7701-2(c) (part of the check-the-box regulations).

Because the regulations treat the affected domestic entities as foreign-owned domestic corporations for the specific purposes of § 6038A, they would be reporting corporations within the meaning of § 6038A. Consequently, they will be required to file Form 5472 with respect to reportable transactions between the entity and its foreign owner or other foreign related parties.

Some disregarded entities are not obligated to file a US federal tax return or to obtain an employer identification number (EIN). The proposed regulation's preamble stated that in the absence of a return filing obligation (and associated record maintenance requirements) or the identification of a responsible party as required in applying for an EIN, it is difficult for the US to carry out the obligations it has undertaken in its tax treaties, TIEAs and similar international agreements.

Section 6001 provides that every person liable for any tax imposed by the Code, or for the collection thereof, must keep records, render statements, make returns and comply with the rules and regulations as the Treasury and the IRS may from time-to-time prescribe.

Entities, including disregarded entities, must have an EIN to file a required return. An entity also must have an EIN in order to elect to change its classification. Because a domestic single-member LLC is classified as a disregarded entity by default, rather than by election and has no separate federal tax return filing requirements, previously there was typically no federal tax requirement for it to obtain an EIN.

The regulations specify as an additional reportable category of transactions for these purposes any transaction within the meaning of Treas. Reg. § 1.482-1(i)(7) (with these entities being treated as separate taxpayers for the purpose of identifying transactions and being subject to requirements under § 6038A) to the extent that they are not already covered by another reportable category. The term 'transaction' is defined in Treas. Reg. § 1.482-1(i)(7) to include any sale, assignment, lease, license, loan, advance, contribution, or other transaction of any interest in or a right to use any property or money, as well as the performance of any services for the benefit of, or on behalf of, another taxpayer.

Thus, contributions and distributions are considered reportable transactions with respect to these entities.

The penalty provisions associated with failure to file Form 5472 and failure to maintain records apply to these entities as well.

The regulations are applicable to taxable years of reporting corporations beginning after December 31 2016, and ending on or after December 31 2017.

Jim Fuller (jpfuller@fenwick.com) and David Forst (dforst@fenwick.com)

Fenwick & West

Website: www.fenwick.com

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