Increased Tax Reporting Requirements for Domestic Disregarded Entities Wholly Owned by Foreign Persons - GT Alert

Sep 19, 2026

Final U.S. Treasury regulations issued Dec. 13, 2016 under Code sections 6038A and 7701 expand foreign-owned domestic disregarded-entity reporting. Domestic single-member LLCs wholly owned by one foreign person are treated as corporations for 6038A, requiring foreign owners to report transactions on Form 5472, including contributions, distributions, interest, and loans. The LLC must file Form 5472 for each related party with reportable transactions, maintain extensive records, and faces $10,000 penalties per required form, with potential criminal exposure for false filings. Taxpayers should review 2017 obligations with counsel.

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Overview of the Final Regulations

Impact on Form 5472 Reporting

Related Parties Covered

Reporting and EIN Requirements

Required Information on Form 5472

Confidentiality and Information Exchange

Record Maintenance Obligations

Penalties and Practical Next Steps

| | | | Tax | Alert~~ ~~ | | --- | --- | --- | --- | --- | January 2017 Increased Tax Reporting Requirements for Domestic Disregarded Entities Wholly Owned by Foreign Persons On Dec. 13, 2016, the U.S. Department of the Treasury issued final regulations to Internal Revenue Code (Code) sections 6038A and 7701. These regulations impact Form 5472 (Information Return of a 25 percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) reporting requirements for foreign-owned domestic single-member LLCs that have not elected to be treated as corporations for [U.S. tax](U.S. tax) purposes. The U.S. Department of the Treasury promulgated the regulations to address situations where a disregarded entity and its foreign owner are not required to file any [U.S. tax](U.S. tax) returns or information returns. For example, if a disregarded entity receives only portfolio interest income or U.S. source income that is fully withheld at source and the foreign owner of the entity is not engaged in [a U.S. trade](a U.S. trade) or business, no return must be filed by either the entity or the owner. This hindered the Internal Revenue Service’s (IRS) ability to track income for [U.S. tax](U.S. tax) purposes and also made it difficult for the United States to provide information to carry out its information exchange obligations with other governments. To ensure that the IRS and other law enforcement agencies have access to information regarding foreign-owned domestic single-member LLCs, the new regulations treat a disregarded entity as a corporation for purposes of Code section 6038A if the entity is a domestic entity and one foreign person has direct or indirect sole ownership of the entity. On a practical level, the regulations require the foreign owner of a domestic single-member LLC to report his transactions with the LLC on a Form 5472, including contributions to and distributions from the LLC, interest paid and received, and amounts loaned or borrowed from the LLC. The LLC must file a Form 5472 for each related party with whom the LLC engaged in reportable transactions during the taxable year. For purposes of Code section 6038A, a foreign related party includes, among others, the following foreign persons: (1) any direct or indirect 25-percent shareholder of the corporation, (2) family members of a direct or indirect 25-percent shareholder of the corporation (such as his brothers and sisters, spouse, ancestors, and lineal descendants), (3) a fiduciary of a trust and a beneficiary of such trust, and (4) two corporations which are members of the same controlled group. For example, assume a Colombian individual forms a domestic single-member Delaware LLC in Year 1 with the intent to treat it as a disregarded entity for U.S. federal tax purposes. The Colombian individual contributes $1,000,000 in cash to the LLC upon formation and the LLC uses the funds for its operating activities. In the same year, the LLC recognizes anet profit on its activities and issues a $100,000 dividend to the Colombian individual. Later that year, the LLC loans $250,000 to the Colombian individual’s brother who is neither a U.S. citizen nor a U.S. resident-alien. In this hypothetical, although the LLC is a disregarded entity for U.S. federal tax purposes and is not required to file its own income tax return, the regulations treat the LLC as a corporation requiring the LLC to file a Form 5472 to report the contribution, dividend and loan in Year 1. In order to file a Form 5472, the LLC must obtain an employer identification number from the IRS. For each Form 5472, the Form must include (1) the name, [U.S. tax](U.S. tax) identification number, if applicable, and address of the related party, (2) the nature of the related party’s business and its principal place of business, (3) each country in which the related party files an income tax return as a resident under the tax laws of that country, (4) the relationship

FAQs

Which entities are affected by the new reporting requirements under Code sections 6038A and 7701?

Domestic single-member LLCs wholly owned by one foreign person that are treated as disregarded entities for U.S. federal tax purposes are treated as corporations for purposes of Code section 6038A, triggering Form 5472 obligations.

What transactions must be reported on Form 5472 for a domestic single-member LLC?

The foreign owner must report reportable transactions with the LLC, including contributions and distributions, interest paid and received, and amounts loaned or borrowed. The LLC must file Form 5472 for each related party involved in reportable transactions during the taxable year.

What are the consequences of failing to file Form 5472 or failing record maintenance?

Failure to file Form 5472 may result in a $10,000 penalty for each required form. The same penalty also applies if the reporting corporation fails to comply with record maintenance requirements; criminal penalties may apply for false or fraudulent information.

Sep 19, 2026

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