The filing requirements and practical application of a US LLC for foreign owners may force many foreign nationals to reconsider their options. As of January 1, 2017, Limited Liability Companies (LLCs) formed in the United States, which are treated as disregarded entities and wholly-owned by foreign persons, are subject to new IRS reporting requirements.
Such foreign-owned US LLCs must file IRS Form 5472 if there are transactions between the direct OR indirect owners of the US LLC and the LLC itself. The IRS is asking for the tax resident status of the direct and indirect owners of US LLCs including information on the amount of cash or assets transferred to or from them. Form 5472 is not an income tax return, it is merely an information return which must be filed annually, but failure to file this form can result in a $25,000 penalty.
Currently, Form 5472 is for information sharing purposes within the IRS. In the future, however, this information may also be shared with other countries. As Form 5472 ties direct and indirect owners with their tax resident status and offshore assets owned by these US LLC’s, the IRS will have more information to share with other government authorities who will be interested in obtaining such information on their tax residents. US LLC’s are typically considered corporate entities in foreign jurisdictions and must have tax resident status somewhere in the world.
The circumstances surrounding movement of capital or assets between a US LLC and its owners, especially across multiple jurisdictions, can be complicated. Most foreign jurisdictions look to where the management and control of these entities occurs to determine tax resident status – Where is the direct owner tax resident? Where is the indirect owner tax resident? Add to that, most foreign countries do not recognize the flow-through status of a US LLC.
Clear advice should be sought for the tax resident status of each entity and who should be paying the expenses incurred by the assets.
Have a question? Contact Darlene Hart.