There are two main sources of reporting requirements for foreign investors in the United States — the Internal Revenue Service and the Bureau of Economic Analysis. The IRS recently upped its game by requiring reports from wholly foreign-owned limited liability companies and other disregarded entities, which is a significant change from past practice.
Section 6038A of the code has long required U.S. corporations that are 25 percent owned by foreign persons to furnish information, maintain records and, in some cases, appoint a U.S. agent for service of process. However, a U.S. limited liability company or other “disregarded entity” owned by a single foreign person was not subject to those requirements. That carve-out vanished when the IRS recently amended the rules to include within the definition of “U.S. corporation” a disregarded entity that is solely owned, directly or indirectly, by one foreign person (a “covered entity”). And there is no exemption for de minimis transactions or entities.
As a result, a corporation that is 25 percent directly or indirectly foreign owned, or a disregarded entity that is owned directly or indirectly by one foreign person, is subject to three main requirements:
Obtain a U.S. Employer Identification Number (EIN). Many foreign-owned disregarded entities obtain an EIN to do business in the United States, for example, to open a U.S. bank account. However, doing so was optional, and some entities did not obtain an EIN, thereby generally staying “below the radar” with the IRS. Under the new rules, every covered entity must obtain an EIN to file the annual report described below.
To obtain an EIN, the covered entity must disclose the name and EIN or Social Security number of a “responsible party” — that is, a person with the power to “control, manage, or direct the entity and the disposition of its funds and assets.” As a result, the foreign sole owner or its controlling person will also need a U.S. tax identification number.
File annual reports. Form 5472 requires information to be provided concerning the covered entity, its owner, and transactions between the U.S. entity and related parties.
Maintain records. The new rules extend the existing general recordkeeping requirements of Section 6001 to covered entities, and also require records for transactions with related parties in order to satisfy the documentation requirements for transfer pricing rules.
The new covered entity rules apply to all taxable years beginning after December 31, 2016, and ending on or after December 13, 2017.
Failure to comply subjects the corporation or covered entity to sanctions, including a penalty of up to $10,000 for failure to file Form 5472 and possible loss of deductions for failure to keep required records.
In addition to the new IRS rules, foreign investors should bear in mind the existing requirement to file Form BEA-13 with the Bureau of Economic Analysis (BEA) of the U.S. Commerce Department. Reportable investments include formation of a new company, acquisition of a business (stock or assets), acquisition of real estate, or expansion of an existing activity. The exact form to be filed depends on the type and amount of the investment transaction. The form must be filed within 45 days after making the investment. Failure to file a required report is subject to a penalty of up to $32,500. The BEA monitors press releases and other public sources and has been known to call companies or their counsel to inquire whether a filing was made for an announced transaction or to ask questions about a filing that was made.
The new IRS reporting rule represents a significant change. Foreign-owned limited liability companies, for the first time, may be required to obtain an EIN and file annual reports with the IRS. Unfortunately, this change could easily go unnoticed by some foreign investors, and the oversight could prove costly. To help ensure compliance with the new rules, and with preexisting reporting requirements, foreign investors should seek advice from an experienced U.S. legal adviser.