Proposed regulations: Reporting obligations of foreign-owned disregarded entity

Proposed regulations in United States

The Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG-127199-15) that would treat a domestic disregarded entity that is wholly owned by a foreign person as a domestic corporation for the limited purposes of the reporting and recordkeeping requirements under section 6038A.

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The proposed regulations [PDF 157 KB] provide that these domestic disregarded entities—that would be deemed to be foreign-owned domestic corporations—would 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 identify an expanded number of “reportable transactions” between the entity and its foreign owner or other foreign related parties
  • To maintain records establishing the accuracy of the information return and the correct U.S. tax treatment of the transactions
  • To obtain an employer identification number (EIN) by filing Form SS-4, and thus would be required to report responsible party information to the U.S. government

The Treasury Department, in a related release, included the following statement about the proposed regulations:


… there is a narrow class of foreign-owned U.S. entities—typically single member LLCs—that have no obligation to report information to the IRS or to get a tax identification number. These "disregarded entities” can be used to shield the foreign owners of non-U.S. assets or non-U.S. bank accounts. Once these regulations are finalized, they will allow the IRS to determine whether there is any tax liability, and if so, how much, and to share information with other tax authorities. This will strengthen the IRS’s ability to prevent the use of these entities for tax avoidance purposes, and will build on the success of other efforts to curb the use of foreign entities and accounts to evade U.S. tax.  

New reporting requirements

As stated in the preamble, the proposed regulations are intended to provide the IRS with improved access to information needed to satisfy obligations under income tax treaties, information exchange agreements, and other international agreements—and to strengthen the enforcement of U.S. tax laws. The proposed regulations would amend the definition of business entities in Reg. section 301.7701-2, and would amend Reg. section 1.6038A-1 and -2.

The proposed regulations also would add a requirement to report related-party transactions under the transfer pricing provisions of the regulations under section 482, if not already covered by another reportable category, and would require reporting of transactions that otherwise would be disregarded for U.S. tax purposes—such as transactions between a disregarded entity and its owner. Thus, today’s proposed regulations expand the term “reportable transaction” to also include contributions and distributions between the entity and its foreign owner (or another disregarded entity of the same owner).

Existing exceptions to the section 6038A reporting requirements for small corporations and de minimis transactions would not apply to disregarded domestic entities that are deemed to be domestic corporations under the proposed amendments to Reg. section 301.7701-2. 

The preamble indicates that the proposed regulations would impose a filing obligation on a foreign-owned disregarded domestic entity for reportable transactions it engages in even if its foreign owner already has an obligation to report the income resulting from those transactions—for example, transactions resulting in income effectively connected with the conduct of a U.S. trade or business.

The preamble to the proposed regulations also announced that the IRS is considering modifications to corporate, partnership, and other tax or information returns (or their instructions) to require the filer of these returns to identify all the foreign and domestic disregarded entities it owns.

Comments requested

The IRS and Treasury specifically have requested comments concerning a filing obligation imposed on a foreign-owned disregarded entity for reportable transactions when the foreign owner has already an obligation to report the income from those transactions—for example, transactions resulting in income that is effectively connected with the conduct of a U.S. trade or business. Comments and requests for a public hearing must be received by a date that is 90 days after Tuesday, May 10, 2016 (the scheduled date of publication of the proposed regulations in the Federal Register.

Proposed effective date

These regulations are proposed to be effective for tax years ending on or after the date that is 12 months after the date when these regulations are published as final regulations in the Federal Register.

KPMG observation

The proposed regulations do not appear to specifically address issues such as the name, address, tax year, and accounting methods to be used by the disregarded domestic entity that would be deemed to be a domestic corporation for purposes of section 6038A, and do not address procedural filing related issues such as a requirement to file a Form 1120, and the identity of the person against which actions would be taken for failures to file and related failures.  

The proposed regulations apparently would not deem a U.S. branch of a foreign corporation to be a foreign owned U.S. corporation if that U.S. branch is not organized as an entity for purposes of Reg. section 301.7701-2. 

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