- 1 Form 5472
- 2 Purpose of Form 5472
- 3 Form 5472 Reporting Corporation
- 4 Related Party Rules under Form 5472
- 5 Form 5472 Reportable Transaction
- 6 Who is a Foreign Person?
- 7 Exceptions From Filing Form 5472
- 8 Failure to File Form 5472
- 9 5472 Form Penalties
- 10 Reasonable Cause for 5472 Penalty Abatement
- 11 Golding & Golding: About Our International Tax Law Firm
Form 5472 refers to Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. While most of the IRS international information reporting forms require US Persons with an interest in (or ownership over) foreign accounts, assets, investments and income to file annual disclosure forms — the 5472 Form is different. The 5472 form is an international tax form that is used by foreign persons to report an interest in or ownership over a U.S. company or subsidiary. It is required by certain non-US Persons (individuals or entities) who have ownership of a US corporation (or Disregarded Entity). The failure to file the return timely may result in significant IRS fines and penalties — although the taxpayer has the opportunity to defend against 5472 penalties and/or pursue reasonable cause or offshore tax amnesty. A few years back, the penalty increased penalty base (increased from $10,000 to $25,000 per violation).
We will summarize the basic requirements of Form 5472, and who may be required to file the form.
Purpose of Form 5472
The purpose of international reporting, in general, is so the Internal Revenue Service can keep tabs on your overseas assets and track transactions that may result in a U.S. tax liability
As provided by the IRS:
“Use Form 5472 to provide information required under sections 6038A and 6038C when reportable transactions occur during the tax year of a reporting corporation with a foreign or domestic related party.”
What is IRC 6038A?
The reference to Internal Revenue Code 6038A is a specific section involving foreign ownership of certain U.S. and related business ownership.
IRC 6038A provides the following:
“If, at any time during a taxable year, a corporation (hereinafter in this section referred to as the “reporting corporation”) —
(1) is a domestic corporation, and
(2) is 25-percent foreign-owned, such corporation shall furnish, at such time and in such manner as the Secretary shall by regulations prescribe, the information described in subsection
(b) and such corporation shall maintain (in the location, in the manner, and to the extent prescribed in regulations) such records as may be appropriate to determine the correct treatment of transactions with related parties as the Secretary shall by regulations prescribe (or shall cause another person to so maintain such records).”
What is IRC 6038C?
Internal Revenue Code 6038C refers specifically to foreign corporations engaged in US transactions.
“If a foreign corporation (hereinafter in this section referred to as the “reporting corporation”) is engaged in a trade or business within the United States at any time during a taxable year—
(1)such corporation shall furnish (at such time and in such manner as the Secretary shall by regulations prescribe) the information described in subsection (b), and
(2) such corporation shall maintain (at the location, in the manner, and to the extent prescribed in regulations) such records as may be appropriate to determine the liability of such corporation for tax under this title as the Secretary shall by regulations prescribe (or shall cause another person to so maintain such records).”
Form 5472 Reporting Corporation
Only reporting corporations have to file Form 5472.
A reporting corporation includes:
“A 25% foreign-owned U.S. corporation (including a foreign-owned U.S. disregarded entity (DE)), or
A foreign corporation engaged in a trade or business within the United States.”
“A corporation is 25% foreign owned if it has at least one direct or indirect 25% foreign shareholder at any time during the tax year.”
25% Foreign Shareholder
“Generally, a foreign person (defined later) is a 25% foreign shareholder if the person owns, directly or indirectly, at least 25% of either:
The total voting power of all classes of stock entitled to vote, or
The total value of all classes of stock of the corporation.
The constructive ownership rules of section 318 apply with the following modifications to determine if a corporation is 25% foreign owned.
Substitute “10%” for “50%” in section 318(a)(2)(C).
Do not apply sections 318(a)(3)(A), (B), and (C), so as to consider a U.S. person as owning stock that is owned by a foreign person.”
Direct 25% Foreign Shareholder
“A foreign person is a direct 25% foreign shareholder if it owns directly at least 25% of the stock of the reporting corporation by vote or value.”
Ultimate Indirect 25% Foreign Shareholder
“An ultimate indirect 25% foreign shareholder is a 25% foreign shareholder whose ownership of stock of the reporting corporation is not attributed (under the principles of sections 958(a)(1) and (2)) to any other 25% foreign shareholder. See Rev. Proc. 91-55, 1991-2 C.B. 784.”
Related Party Rules under Form 5472
The related party rules are complicated.
In general, the related party rules mean that certain related persons (individuals or entities) may be attributed ownership of a company that they do not directly own. It is also referred to as constructive ownership.
As provided by the IRS:
“A related party is:
– Any direct or indirect 25% foreign shareholder of the reporting corporation
– Any person who is related (within the meaning of section 267(b) or 707(b)(1)) to the reporting corporation
– Any person who is related (within the meaning of section 267(b) or 707(b)(1)) to a 25% foreign shareholder of the reporting corporation, or
– Any other person who is related to the reporting corporation within the meaning of section 482 and the related regulations. “Related party” does not include any corporation filing a consolidated federal income tax return with the reporting corporation.”
Form 5472 Reportable Transaction
Not all transactions that are reportable to the IRS on Form 5472 et seq.
Rather, the IRS specifies which specific transactions are reportable, include:
“A reportable transaction is:
– Any type of transaction listed in Part IV (for example, sales, rents, etc.) for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year; or
– Any transaction or group of transactions listed in Part IV, if:
– Any part of the consideration paid or received was not monetary consideration, or
– Less than full consideration was paid or received. Transactions with a U.S. related party, however, are not required to be specifically identified in Parts IV and VI.”
Who is a Foreign Person?
Only foreign persons who meet the definition of the term “foreign person” are required to file the form.
There are several exceptions, exclusions, and limitations as well.
As provided by the IRS, a foreign person includes:
“- An individual who is not a citizen or resident of the United States;
– An individual who is a citizen or resident of a U.S. possession who is not otherwise a citizen or resident of the United States;
– Any partnership, association, company, or corporation that is not created or organized in the United States
– Any foreign estate or foreign trust described in section 7701(a)(31); or
– Any foreign government (or agency or instrumentality thereof) to the extent that the foreign government is engaged in the conduct of a commercial activity as defined in section 892.
However, the term “foreign person” does not include any foreign person who consents to the filing of a joint income tax return.”
Exceptions From Filing Form 5472
As further provided by the IRS, a reporting corporation is not required to file Form 5472 if any of the following apply:
“- It had no reportable transactions of the types listed in Parts IV and VI of the form.
– A U.S. person that controls the foreign related corporation files Form 5471 for the tax year to report information under section 6038.
To qualify for this exception, the U.S. person must complete Schedule M (Form 5471) showing all reportable transactions between the reporting corporation and the related party for the tax year.
**This exception does not apply to foreign-owned U.S. DEs.
– The related corporation qualifies as a foreign sales corporation for the tax year and files Form 1120-FSC. This exception does not apply to foreign-owned U.S. DEs.
– It is a foreign corporation that does not have a permanent establishment in the United States under an applicable income tax treaty and timely files Form 8833.
– It is a foreign corporation all of whose gross income is exempt from taxation under section 883 and it timely and fully complies with the reporting requirements of sections 883 and 887.
– Both the reporting corporation and the related party are not U.S. persons as defined in section 7701(a)(30) and the transactions will not generate in any tax year:
– Gross income from sources within the United States or income effectively connected, or treated as effectively connected, with the conduct of a trade or business within the United States; or
– Any expense, loss, or other deduction that is allocable or apportionable to such income.”
Failure to File Form 5472
When a person does not file the Form 5472 timely, they may be subject to fines and penalties.
5472 Form Penalties
“A penalty of $25,000 will be assessed on any reporting corporation that fails to file Form 5472 when due and in the manner prescribed. The penalty also applies for failure to maintain records as required by Regulations section 1.6038A-3.
Note. Filing a substantially incomplete Form 5472 constitutes a failure to file Form 5472.
Each member of a group of corporations filing a consolidated information return is a separate reporting corporation subject to a separate $25,000 penalty and each member is jointly and severally liable.
If the failure continues for more than 90 days after notification by the IRS, an additional penalty of $25,000 will apply.
This penalty applies with respect to each related party for which a failure occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period ends.”
Reasonable Cause for 5472 Penalty Abatement
When a person qualifies for reasonable cause, they may avoid the fines and penalties associated with late, incomplete or an unfiled Form 5472.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
Contact our firm today for assistance.