Purpose of the form
Internal Revenue Service Form 5472 is an informational form that discloses the transactions during the tax year of a Reporting Corporation (the US Taxpayer) with a foreign or domestic Related Party. The form is filed as part of the US Taxpayer’s tax return (usually Form 1120 or 1120-F) and is due when the income tax return is due, including any extensions. A separate Form 5472 filing is required for each related party with whom the US Taxpayer has transactions during the taxable year.
Who is a Reporting Corporation?
A Reporting Corporation is either:
- A 25% foreign-owned US corporation; or
- NEW – Foreign-owned US Disregarded Entity (DE) – see below; or
- A foreign corporation engaged in a trade or business within the United States
What is a reportable transaction?
A reportable transaction could be any of the following:
- Sales/Purchases of inventory
- Sales/Purchases of other tangible property
- Cost Sharing Transactions Payments (paid or received)
- Rents or royalties (paid or received)
- Sales/Purchases, leases or licenses of intangible property rights (paid or received)
- Consideration paid or received for certain services
- Commissions paid or received
- Amounts borrowed or loaned
- Interest paid or received
- Premiums paid or received for insurance or reinsurance
- For DE’s ONLY – Equity transaction that include amounts paid or received in connection with the formation, dissolution, acquisition and disposition of the entity, including contributions to and distributions from the entity
- Other amounts paid or received to the extent that these amounts are taken into account in determining the taxable income of the reporting corporation.
Which owners must be disclosed?
Form 5472 requires that the name and identifying information of two types of owners be listed:
- Any shareholder who owns 25% or more directly; and
- Any shareholder who ultimately owns 25% or more of the foreign corporation.
For the latter disclosure, it may be required to look through several tiers of ownership to determine this information. Indirect and constructive owners must be considered to determine the ultimate shareholder(s). While there are specific definitions of indirect and constructive ownership which must be considered, these rules are generally quite broad.
Who is a Related Party?
A Related Party includes any direct or indirect 25% foreign shareholder of the reporting corporation as well as other entities which meet the tax definition of “related”. Like the requirements to determine ownership, these rules are specifically listed, but are broadly written.
What’s New about Form 5472?
Foreign-owned US Disregarded Entity (DE). A foreign-owned US DE is a domestic DE that is wholly owned by a foreign person. For tax years beginning on or after January 1, 2017, a foreign-owned US DE is treated as an entity separate from its owner and is required to file Form 5472. Note that this is a departure from the typical US tax treatment of DEs which are usually not required to make any separate filings. For example, if a UK Limited Company owns 100% of a US Limited Liability Company, absent a “check the box” election, the existence of the US LLC would be ignored for most tax purposes. The UK Limited Company would file a Form 1120-F as if it were operating in the US as a branch. While a foreign-owned US DE continues to have no income tax return filing requirement, it will now be required to file a pro-forma Form 1120 with Form 5472 attached.
A penalty of $10,000 will be assessed on any Reporting Corporation that fails to file Form 5472 when due and in the manner prescribed. In addition, other penalties can apply beyond the basic $10,000 late filing penalty. Note that filing a substantially incomplete Form 5472 constitutes a failure to file Form 5472.
Starting with tax years beginning after December 31, 2017 the filing penalty drastically increases to $25,000. This further magnifies the care taxpayers (and their tax advisers) need to put in assessing their foreign compliance needs.
Since Form 5472 requires reporting of all related party transactions with foreign related entities understanding the client’s worldwide business structure is extremely important. It is also important to understand the ultimate ownership of a foreign corporation to properly identify 25% or more
The above discussion is presented in summary form to explain the concepts behind Form 5472 filing. Please refer to the Form instructions for more specific information. Given the significant penalties associated with failure to file a complete Form 5472, this form should be a high priority in the tax filing process. For taxpayers who may be out of compliance with Form 5472 filing requirements, please contact our office to discuss remediation options.