Written on behalf of Feigenbaum Consulting
Efforts to fight cross-border tax evasion and other forms of international financial fraud are on the rise. As part of this effort, the US Treasury Department and Internal Revenue Service are making it more difficult for foreign entities to evade local taxes by increasing the compliance and reporting requirements for foreign disregarded entities.
Tax evasion concerns associated with foreign disregarded entities
The DRE enables a foreign entity to use a single owner LLC to hold large amounts of cash, and purchase assets including property. Unless they elect to be treated as a corporation, there is no obligation to disclose the usual information required by the IRS from a foreign corporation.
Although using an LLC in this way to buy assets may simply be a way for wealthy individuals to ensure personal privacy, or to avoid legal liability, it can also be used for money laundering and other fraud. The international community also views the treatment of DREs as an easy way for foreign tax cheats to use US LLCs to hide assets from their home countries.
Changes to treatment of foreign disregarded entities
Although they will continue to be disregarded for the majority of tax purposes, DREs will now be required to meet a number of reporting and compliance requirements. These requirements apply regardless of whether the DRE is owned directly, or through various other entities.
DREs will be required to file form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engage in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code), and include identifying information about the owner. They must also keep detailed records of related party transactions, obtain an employer identification number, and identify a “responsible party” for the entity.
If the foreign owner of a DRE does not have a personal US tax return filing obligation, the tax year for the DRE will be the calendar year. Otherwise, it will be the same tax year as their foreign owner.
These regulations apply to tax years of any entities beginning after January 1, 2017, and ending on or after December 13, 2017.
Toronto tax lawyers for cross-border corporate tax planning
These changes to the use of DREs by foreign entities will have significant impact on tax planning for any non-American that is currently taking advantage of the tax treatment of the DRE designation.
At Feigenbaum Tax Law, our lawyers can review your current tax structure and determine whether these changes will impact your corporate planning. Our team can help build a tailored solution to meet your needs.
If you have questions about changes to the treatment of DREs held by foreigners, contact us online, or call our office toll free at (877) 275-4792 to make an appointment.