Many of our clients here at Grumble are not US-based corporations or they have shareholders/owners who are not US citizens. When it comes to tax filing time, these clients need to be aware of the IRS requirements for 25% foreign-owned US corporations or for foreign corporations engaged in a US trade or business.
Such tax returns must be made timely on IRS Form 5472 and there are important facts to be noted for such returns.
Who is liable
The IRS defines corporations and or persons who are required to file under this form as:
● A reporting corporation, which is either a 25% foreign-owned US corporation (including a foreign-owned US disregarded entity (DE)), or a foreign corporation engaged in a trade or business within the US. There is no definition in the tax statute of the term trade or business within the US – instead, that concept has been developed mainly by the IRS and court decisions through a facts-and-circumstances analysis. A foreign corporation needs to consider the nature and extent of its economic activities in the US, either directly or through its agents. The following have been considered to be important factors by the courts and/or the IRS:
○ The business must have a profit motive.
○ Activities generally must be ‘considerable, continuous and regular.’
○ An agent’s activities in the US may result in a US trade or business.
● A corporation is 25% foreign owned if it has at least one direct or indirect 25% foreign shareholder at any time during the tax year.
● Generally, a foreign person is a 25% foreign shareholder if the person owns, directly or indirectly, at least 25% of either the total voting power of all classes of stock entitled to vote, or the total value of all classes of stock of the corporation.
There are considerable penalties that may ensue from a failure to lodge such a return.
● A penalty of $25,000 will be assessed on any reporting corporation that fails to file Form 5472 when due and, in the manner, prescribed.
● The penalty also applies for failure to maintain records as required by Regulations section 1.6038A-3.
● Filing a substantially incomplete Form 5472 constitutes a failure to file Form 5472.
● Each member of a group of corporations filing a consolidated information return is a separate reporting corporation, subject to a separate $25,000 penalty, and each member is jointly and severally liable.
● If the failure continues for more than 90 days after notification by the IRS, an additional penalty of $25,000 will apply. This penalty applies with respect to each related party for which a failure occurs for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period ends.
● Criminal penalties under sections 7203, 7206 and 7207 also may apply for failure to submit information or for filing false or fraudulent information.
Record maintenance requirements
A reporting corporation must keep the permanent books of account or records as required by section 6001. These books must be sufficient to establish the correctness of the reporting corporation’s federal income tax return, including information or records that might be relevant to determine the correct treatment of transactions with related parties.
An assessment of the annual time required to fulfil these tax obligations is about 25 hours and this can be even longer if clients are not acquainted with US tax law. At Grumble, we provide a personal approach to help you keep your business legal and compliant, by leveraging our knowledge and global experience. We can help you with this and your other accounting and tax related needs.