A single member LLC is considered a “disregarded entity” for U.S. tax purposes, and accordingly its operations are reported on the member’s individual tax return. Where a single member LLC is owned by a non U.S. person or entity, new regulation 301.7701-2(c)(2)(vi)(A) classifies these entities as corporations. This triggers Internal Revenue Code section 6038A under which, effective for tax years ending after 2016, Form 5472 must be filed timely each year to report transactions with foreign owners, even if a tax return is not required. Failure to file form 5472 can result in a penalty of $10,000 per occurrence.
Let’s examine how this new rule impacts a SMLLC directly owned by a ‘US person” (USCO) but indirectly owned by a non U.S. person and/or entity (such as Canadian corporations and individuals). The actual Regulation follows.
(vi)Special rule for reporting under section 6038A -
(A)In general. An entity that is disregarded as an entity separate from its owner for any purpose under this section is treated as an entity separate from its owner and classified as a corporation for purposes of section 6038A if -
(1) The entity is a domestic entity; and
(2) One foreign person has direct or indirect sole ownership of the entity.
(1)Indirect sole ownership. For purposes of paragraph (c)(2)(vi)(A)(2) of this section, indirect sole ownership means ownership by one person entirely through one or more other entities disregarded as entities separate from their owners or through one or more grantor trusts, regardless of whether any such disregarded entity or grantor trust is domestic or foreign.
SMLLC is a foreign owned single-member (SM) LLC. Yet, while the new law requires a foreign owned SMLLC to file 5472 (in spite of being disregarded for income tax and other certain purposes) the requirement is limited to the when the ownership test described above is met. Where none of SMLLC’s indirect owners have ‘ownership by one person entirely through one or more other entities disregarded as entities separate from their owners or through one or more grantor trusts, regardless of whether any such disregarded entity or grantor trust is domestic or foreign’ SMLLC would appear to not be required to separately file its own Form 5472.
That said, SMLLC must still report any reportable transactions it has with foreign related parties on USCO’s 5472 and as USCO (USCO is the reporting taxpayer and SMLLC is disregarded into it).
In SMLLC’s case, it is owned by a US entity filer, USCO, who may anyway file its own 5472 to report its own reportable foreign related party transactions. Thus in such scenario, SMLLC’s reportable 5472 transactions are simply included on USCO’s 5472 (and should SMLLC in a future year be the only entity of the two with reportable related party transactions, it would continue to report those on USCO’s 5472; but if the structure were changed so that SMLLC met the Regulation ownership test described above, SMLLC would file its own separate 5472).