Who Must File Form 5472?
Originally published on August 15, 2022
Updated on August 23rd, 2022
A U.S. corporation is taxable by the U.S. on all of its income from all domestic and foreign sources. Foreign corporations are taxable by the U.S. on U.S.-source income depending on whether it’s effectively connected with a U.S. trade or business or a permanent establishment in the U.S. Other types of income might be subject to a U.S. withholding tax.
In recent years, the U.S. Congress has significantly increased compliance enforcement of international information reporting requirements. For example, when the Tax Cuts and Job Act (TCJA) was signed into law in December of 2017, the penalty for noncompliance with the international IRS Tax Form 5472 increased from $10,000 to $25,000. The goal is to enforce tax obligations on corporations and reduce the amount of sheltered corporate earnings.
What is IRS Form 5472, and who must file it?
IRS Form 5472 is a required informational return for any U.S. corporation with 25% direct or indirect foreign ownership and with reportable transactions with a foreign or domestic related party during the tax year.
A corporation must file Form 5472 if it’s a reporting corporation that had a reportable transaction with a related party during its tax year. A corporation is a reporting corporation if it’s either:
- A 25% foreign-owned U.S. corporation, or
- A foreign corporation engaged in a trade or business within the United States.
A U.S. corporation is 25% owned by a foreign shareholder if they own (directly or indirectly) at least 25% of:
- The total voting power of all classes of voting stock, or
- The total value of all classes of its capital stock.
What are Form 5472 reportable transactions?
Section 6038 Treasury Regulations provide the framework for taxpayer compliance with various international reporting requirements. These include Form 5471, Form 5472 and Form 8938. Section 6038 defines 2 categories of reportable transactions:
- Any foreign-related party transactions for which only monetary consideration is paid or received by the reporting corporation [Treas Regs §1.6038A-2(b)(3)]
- Any foreign-related party transactions involving non monetary consideration or less than full consideration [Treas Regs §1.6038A-2(b)(4)]
The regulations include many examples, such as this one:
“In year 1, W, a foreign corporation, forms and contributes assets to X, a domestic limited liability company (taxable as a partnership). In year 2, W contributes funds to X. In year 3, X makes a payment to W. In year 4, X, in liquidation, distributes its assets to W.”
Each of the transactions in years 1 through 4 is a reportable transaction that X must report on Form 5472.
The IRS employs a broad interpretation of reportable transactions. Some examples include:
- An exchange of property or money, including rental income, payments, remuneration, sales transactions, commissions and capital contributions
- A foreign owner or related party’s use of a U.S. company property
- Loans and interest payments between a U.S. corporation and a foreign owner
- A foreign-owned U.S. LLC’s formation, acquisition, disposition and dissolution
For purposes of reportable transactions, a related party is:
- Any foreign 25% shareholder of the reporting corporation;
- Any person who is related to the reporting corporation;
- Any person who is related to a foreign 25% shareholder of the reporting corporation; or,
- Any other person who, with the reporting corporation, is controlled by the same interests within the meaning of Section 482 of the Internal Revenue Code.
Penalties for Noncompliance With 6038
Failure to furnish the 6038 information on Form 5472 is subject to a $25,000 fine for each annual accounting period. The penalty increases in $25,000 increments for each 30-day period during which the failure continues following an initial 90-day grace period.
Criminal penalties may be imposed in the case of an egregious failure to comply or filing false information.
How to File Form 5472
A reporting corporation must file Form 5472 as an attachment to its income tax return (Form 1120) by the due date (including extensions) of that return.
Can an extension be filed for Form 5472?
A reporting corporation can request an extension of time to file Form 7004 before the regular due date of its return.
Get help with your tax needs.
Section 6038 gives the Secretary of the Treasury broad authority to enforce the policy of that section and define who must comply and what transactions are covered. The Treasury Department has promulgated extensive and complex regulations under Code 6038 and instructions for Form 5472.
Given such broad IRS interpretation authority, you should presume any transaction (direct or indirect) between a U.S. corporation and a 25% foreign stake owner will be treated as a reportable transaction. You can then look for exceptions if they exist.
However, this article has only touched the surface of the reporting rules of Code Section 6038 and Form 5472. You need first-hand advice from our international tax experts to analyze the specific elements of your plans for doing business in the United States.
At James Moore & Co., our staff is highly experienced with tax compliance for international businesses as well as planning for the best structure of intercompany transactions. Contact us today for assistance with your tax needs so we can help your business grow.
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