On May 23, 2016, Internal Revenue Bulletin 2016-21 was released which proposes amendments to the regulations governing IRC 6038A.
The regulations are proposed to be applicable for taxable years ending on or after the date that is 12 months after the date these regulations are published as final regulations in the Federal Register.
IRS Form 5472 is filed if there is a “reporting corporation” that has “reportable transactions”.
Presently, regulation 1.6038A-1(c) (1) defines “Reporting Corporation” for purposes of IRC 6038A as follows:
For purposes of section 6038A, a reporting corporation is either a domestic corporation that is 25-percent foreign-owned as defined in paragraph (c)(2) of this section, or a foreign corporation that is 25-percent foreign-owned and engaged in trade or business within the United States. After November 4, 1990, a foreign corporation engaged in a trade or business within the United States at any time during a taxable year is a reporting corporation.
Regulation 1.6038A-2(a) (1) states that the reporting corporation must file IRS Form 5472 only when there are reportable transactions. A list of reportable transactions may be found in the instructions to IRS Form 5472 and in the regulations.
The proposed regulations will treat “domestic disregarded entities” that are wholly owned by foreign persons as “domestic corporations” for purposes of filing IRS Form 5472. Therefore if a LLC has “reportable transactions”, IRS Form 5472 will have to be filed, barring any safe harbor or other exemptions outlined in the regulations. The proposed regulations also include an additional category of “reportable transactions”.
Although not recommended for Canadian investors to directly invest in a LLC due to the mismatch of income and foreign tax credits as Canada does not recognize the flow-through status of a LLC, the foregoing proposed amendments will obviously affect Canadians who have invested in a LLC.