Final regulations for US disregarded entities could expose many taxpayers to potential penalties

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February 2017

Overview

Treasury and the IRS issued final regulations on December 13, 2016, that create tax reporting and record maintenance requirements for certain US disregarded entities (DEs). The regulations require US entities that are directly or indirectly owned entirely by a single foreign person and are disregarded as entities separate from those foreign owners, to file Forms 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.

The Final Regulations are generally similar to the proposed regulations, which were issued on May 11, 2016 and clarify that, in most cases, the exceptions from filing Form 5472 that apply to other foreign-owned US corporations do not apply to foreign-owned US DEs. 

Companies required to file such reports are liable for penalties of at least $10,000 for each Form 5472 that is not timely filed or is filed inaccurately or for failure to maintain the required records; penalties may increase significantly in the case of continued failures. The Final Regulations became effective on December 13, 2016 and apply to taxable years of entities beginning on or after January 1, 2017, and ending on or after December 13, 2017. It is unclear whether action by the new Trump Administration or US Congress relating to regulations issued during the final days of the Obama Administration may cause these regulations to be withdrawn or modified.

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Bernard Moens

US Inbound International Tax Services Leader, PwC US

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