Proposed Regulations Impose Reporting Obligations on Foreign-Owned U.S. Entities

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May 10, 2016

Today, the IRS published proposed regulations that would impose reporting obligations upon a domestic disregarded entity wholly owned by a foreign person (foreign-owned DDE).  Specifically, the proposed regulations would amend Treasury Regulation § 301.7701-2(c) to treat a foreign-owned DDE as a domestic corporation separate from its owner for the limited purposes of the reporting, recordkeeping, and other compliance requirements that apply to 25 percent foreign-owned domestic corporations under Section 6038A of the Internal Revenue Code.  These changes broaden the IRS’s access to information that would help the IRS enforce tax laws under the Code and international treaties and agreements.

The proposed regulations would render foreign-owned DDEs reporting corporations under Section 6038A.  Accordingly, a transaction between a foreign-owned DDE and its foreign owner (or another disregarded entity of the same owner) would be considered a reportable transaction for purposes of the reporting and recordkeeping rules under Section 6038A, even though the transaction involves a disregarded entity and generally would not be considered a transaction for other purposes (e.g., adjustment under Section 482).  Thus, a foreign-owned DDE would be required to file Form 5472 for reportable transactions between the entity and its foreign owner or other foreign-related parties, and maintain supporting records.  Further, to file information returns, a foreign-owned DDE would have to obtain an Employer Identification Number by filing a Form SS-4 that includes responsible party information.

This rulemaking project is still in its infancy, and it remains to be seen if and how the IRS harmonizes the proposed regulations with existing rules.  For example, the proposed regulations impose a filing obligation on a foreign-owned DDE for reportable transactions even if its foreign owner already has an obligation to report the income resulting from those transactions (e.g., transactions resulting in income effectively connected with the conduct of a U.S. trade or business).  The Treasury Department and the IRS sought comments on possible alternative methods for reporting the disregarded entity’s transactions in these cases.  In the preambles, the IRS also stated that it is considering changing corporate, partnership, and other tax or information returns (or their instructions) to require foreign-owned DDEs to identify all the foreign and domestic disregarded entities it owns, consistent with the proposed regulations.

These proposed regulations will apply for tax years ending on or after May 10, 2017.  Comments and public hearing requests are due by August 8, 2016.