IRS Finalizes Regulations Imposing Reporting Obligations on Foreign-Owned U.S. Entities

Yesterday, the IRS issued final regulations that impose reporting obligations on a domestic disregarded entity wholly owned by a foreign person (foreign-owned DDE).  The final regulations amend Treasury Regulation § 301.7701-2(c) to treat a foreign-owned DDE as separate from its owner for purposes of reporting, recordkeeping, and other compliance requirements imposed under Code section 6038A.  The effect of these final regulations is to enhance the IRS’s access to information needed to enforce tax laws and international treaties and agreements.

We discussed the substance of these regulations in an earlier post, and the final regulations reflect the proposed regulations with only minor clarifying changes.  The primary clarification relates to the intent of the IRS to disallow the exceptions to the requirements of Code section 6038A for a foreign-owned DDE.  The proposed regulations explicitly disallowed two of these exceptions, but the application of two additional exceptions was left unclear.  In the final regulations, the IRS expressly prevents a foreign-owned DDE from utilizing either of the remaining two exceptions to the Code section 6038A reporting requirements.

Under the regulations, 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 Code 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 Code section 482).  Thus, a foreign-owned DDE will 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.

The final regulations reflect several other minor changes intended to ease the compliance burden for foreign-owned DDEs.  Specifically, a foreign-owned DDE has the same tax year as its foreign owner if the foreign owner has a U.S. tax return filing obligation, and if not, the foreign-owned DDE’s tax year is generally the calendar year.  The final regulations are applicable to tax years of entities beginning after December 31, 2016 and ending after December 12, 2017.