Tax Form 5472 for Foreign Owned U.S. Corporations
Are you a foreign owner of a U.S. corporation? If so, you may have heard about Tax Form 5472 and wondered what it’s all about. Well, wonder no more! In this blog post, we’ll dive deep into everything you need to know about Tax Form 5472 – from who needs to file it, when to file it, and how to do it correctly.
To start with, Tax Form 5472 is slightly different as compared to the rest of the forms by IRS. Earlier, this form was also known as the Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Essentially this particular form needs to be filed if you:
- Own a US-based company, that has a non-US person. This is inclusive of either individuals or businesses and should own a minimum of 25% of the company stock.
- The organization is of foreign origin and is involved in US trade and business.
- The company is a US LLC and is owned by a foreign entity. In this case, it is considered a disregarded entity.
Generally speaking, the IRS needs to maintain oversight on US businesses that are ‘foreign-owned’ or foreign businesses that enjoy significant ties with the US. Hence, Tax form 5472 helps the do just that, as it helps disclose information regarding specific reportable transitions that take place with a foreign or a domestic related party.
Who Needs to File the Tax Form 5472
In this case, the US corporations with about 25% or above of foreign ownership or other foreign organizations that are under business ties with the US need to file this form 5472. In this form, it is required by the concerned parties to report all the existing related parties and also fill out separate forms for every foreign owner. In case you need to file on behalf of a foreign-owned US company then, you will also have to file another Tax form 1120 along with it.
Let us take a look at some examples of such applications:
- Equal Ownership by Three People over Company A: In this case, if the company is owned by two US citizens and an Australian citizen, then the company will have to file a single form 5472.
- Ownership By A Single US person over a Company B: However, in this case, the owner has ‘given’ one foreign national about 26% of the stock options as a reward for assisting in brainstorming the organization’s inaugural product. In this case, also the company will need to file a single Form 5472.
- Company C, which is US owned by a foreign citizen and is categorized as a disregarded entity for tax: In this case also, Company D will have to file a single Form 5472.
- According to the IRS:“Use Form 5472 to provide the 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.”
Read More-: Tax Form 5471
IRC 6038C: What is this?
This is specifically for the foreign corporations that are involved in US transactions as referred by the Internal Revenue Code.
In case a foreign corporation or a reporting corporation is involved in a business or trade with the US at any time during the taxable year.
In case the corporation needs to furnish at the specified time and in a manner as the Secretary shall by the prescribed regulations. This is according to the information provided in subsection (b)
The corporation needs to maintain specified records: the location, the manner and to a certain extent as prescribed in regulations. These records might be appropriate to finalize the liability of the organization for taxation under the category as the Secretary shall according to the prescribed regulations. This can also be done by another person to maintain these records.
What is a Reporting Corporation?
One has to bear in mind that form 5472 only has to be filed by a reporting corporation. But, what is a reporting corporation? Well, these include:
A reporting Corporation includes:
- A 25% foreign-owned US corporation and this is also inclusive of a foreign-owned US disregarded entity or DE.
- A foreign corporation that is involved in a business or trade within the United States.
The Exceptions: When considering Filing
However, concerning the process of filing tax form 5472, there are a few exceptions. These include:
- If there have been no reportable transactions for that particular year by the company. In case you need to know more about reportable transactions, you can check out the official IRS website.
- In case the organization has been regarded as a foreign sales corporation for the tax year and has filed the form 1120-FSC. However, this exception does not apply to foreign-owned US DEs.
- In case the filing has been done as a foreign corporation that does not own a permanent establishment in the US. Then under the income tax treaty, one has to file the proper paperwork or Tax Form 8833.
- In case the gross income exemption under section 8833 has been encountered by the foreign corporation and completely complies with reporting requirements of sections 883 and 887.
The Form 5472 Reportable Transaction: All About it
One needs to know that not all transactions are reportable to the IRS. The specific transactions that are reportable are:
- The type of transaction that is listed under Part IV: are sales and rent. This is for the transactions for which the monetary considerations include US and Foreign currency. This is the only consideration that is paid or received during the reporting corporation’s tax year.
- The transaction listed or grouped under section IV in case: the part of the consideration is received or paid was not monetary consideration.
- Less than complete consideration that has been received or paid. This is the transaction with the US-related party but is not required to be specially identified in PArts IV and VI.
The Foreign Person: Who is it?
The individuals who qualify as foreign persons are only qualified to fill the form 5472. For a person to qualify as ‘foreign,’ they need to fill in the following categories:
- A person who is not a resident or a citizen of the United States
- A person who is a resident or a citizen of US possession who, otherwise is not a citizen or a resident of the United States.
- Any form of association, partnership or company, or corporation which is not created or organized in the United States.
- A foreign trust or estate is described in section 7701(a)(31).
- Any foreign agency or government or instrumentality thereof to the degree that the foreign government is involved in the conduct of a certain commercial activity as listed under section 892.
- But one has to bear in mind that the term Foreign does not include an individual who consents to the filing of joint income tax returns.
There are certain penalties that the person will need to ‘pay up if the tax form 5472 is not filed on time:
- A penalty of $25000 will be levied on any reporting corporation that fails to file the tax form 5472 on the due date and as prescribed. This is also applicable in case the corporation fails to maintain the records according to the regulation of section 1.6038A-3.
- Filing an incomplete form 5472 is regarded as a failure to file the form altogether.
- It has to be noted that every member of a corporation or the group that is involved in consolidated information is regarded as a separate reporting corporation that is subjected to a separate $25000 penalty. Also, each member is jointly and severally liable.
- In case the failure to file continues for more than 90 days despite the notification by IRS, then an additional penalty of $25000 is also applicable.
- The penalty is applicable concerning every related party for which the failure occurs every 30 days or a portion of the 30 days. The failure continues even after the 90 days ends ( in this case)
The Due Date: To File the Tax form 5472
Usually the tax form is due at the same time the company’s income tax returns. As for the year 2022, the due date would fall on April 18th 2023. One can also file for a six-month extension for the form 1120 and the form 5472 will be filed on the same date. This is generally, 16th of October, for the 2022 tax year. One needs to file a new form 5472 every year that the company or the corporation meets the filing requirements.
Also Read-: Tax Form 1065
Filing taxes is not necessarily complicated and do not have to be so. However, paying your taxes on time is a good and a beneficial practise. However, if you have any doubts or need any assistance for the same, be sure to reach out to our team of experts and we will guide you accordingly.
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💠Frequently Asked Questions💠
What is a 25% foreign Owned Corporation?
A corporation is considered to be 25% foreign owned if it comprises at least one direct or indirect 25% foreign shareholder at any point in time for the tax year.
What is a 25% Foreign Shareholder?
This is a foreign individual who directly or indirectly owns a minimum of 25% of:
🔹 The total voting power of all the categories of stock that are entitled to vote
🔹 The total value of all the categories of the stock of the corporation.
🔹 The applicable rules of section 318 with certain modifications determine if the corporation is 25% foreign-owned.
🔹 To substitute 10% for 50% under section 318 (a)(2)(c).
🔹 Do not apply sections 318(a)(3)(A), (B), and (C), to consider a U.S. person as owning a stock that is owned by a foreign person.”
Who is a direct 25% Foreign Shareholder?
If the individual owns a minimum of 25% of the shares directly of the stock of the reporting corporation by either the vote or value, then they are considered to be a 25% foreign shareholder.
Who is an ultimate Indirect 25% Foreign Shareholder?
This is a 25% foreign shareholder who owns the stock of the reporting corporation but is not attributed to any other 25% foreign shareholders under the principles of a section of 958(a)(1) and (2).
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