As an NRA, you are subject to US tax on business income if you are “engaged in a trade or business in the United States“, short “ETBUS”. This article covers the following:
- The Basics of Taxation for Non-Resident LLC Owners
- Getting a Handle on Form 5472
- IRS Form 5472 and a foreign-owned single-member limited liability company
- What is the definition of a foreign person?
- What about foreign-owned multi-member limited liability companies (LLCs)?
- Who is required to file Form 5472?
- Non-Resident Status
- What is a U.S. Person, and how can I become one?
- Takeaway: Non-Resident Alien vs. Resident Alien
- Takeaway (foreigner vs U.S. person)
- Multi-Member Limited Liability Companies
- What about foreign-owned multi-member limited liability companies (LLCs)?
- Requirements for foreign-owned multi-member limited liability companies
- Transactions between related parties that must be reported
- Tax Treaties with the IRS and International Information Sharing Filling out your tax forms
- When is Form 5472 due to being submitted?
- What address should I use?
The Fundamentals of Taxation for Non-Resident Limited Liability Company Owners
A high-level fundamental review of the tax filing requirements for foreign-owned, single-member and multi-member limited liability companies (LLCs) is provided in this whitepaper (Limited Liability Companies).
Here are a few crucial points to remember:
This article is intended for non-U.S. residents and non-U.S. citizens (foreigners) who have created a limited liability company (LLC) in the United States of America.
Form 5472 and Form 1120 must be filed by your LLC if it does not already have an EIN.
This page merely provides a high-level summary of Form 5472. There are no explicit step-by-step instructions included. Furthermore, as a foreigner, you have additional reporting obligations with the IRS that are not included here. The use of a professional accountant is highly recommended.
This is an important need that should be treated carefully. If Form 5472 is not submitted or is filed erroneously, the Internal Revenue Service (IRS) assesses a minimum penalty of $25,000 USD (up from $10,000).
Accountants and tax preparation services are available.
We strongly advise you to consult with an accountant because the Internal Revenue Service (IRS) takes your tax obligations as a non-resident business owner in the United States very seriously.
Foreign-owned single-member limited liability company and IRS Form 5472
To begin, it’s vital to note that if you have a Single-Member LLC (1 owner) that is owned by a foreign entity, you must submit Form 5472 and Form 1120 with the IRS on an annual basis to avoid being penalised.
Form 5472: A High-Level Overview
The obligation for foreign-owned U.S. corporations to submit Form 5472 and Form 1120 has been in place for some time; however, the Internal Revenue Service (IRS) recently issued TD 9796 and amended Section 1.6038A-1 of the Code of Federal Rules to include new regulations. These new amendments took effect on January 1st, 2017, and now apply to all foreign-owned Single-Member LLCs that are Disregarded Entities as well as all other foreign-owned Single-Member LLCs.
Beginning in 2017, all foreign-owned Single-Member LLCs that were previously recognised as Disregarded Entities will now be treated as Corporations for the purposes of federal reporting obligations (i.e., submitting information to the Internal Revenue Service). This does not suggest that the LLC is paying taxes in the same manner as a corporation, but rather that it is just reporting information in the same manner as a corporation.
An LLC with a single member is automatically classified as a Disregarded Entity by the Internal Revenue Service unless the LLC has filed a specific election to be taxed as a Corporation. For federal tax purposes, the term “disregarded” simply indicates that the Internal Revenue Service “ignores” the LLC, which is taxed in the same manner that the owner is taxed.
LLCs that fall into the following categories must submit Form 5472 and Form 1120 on an annual basis:
Unincorporated Limited Liability Company with a single member that is disregarded and owned by a non-US resident or foreign corporation
A single-member limited liability company that is controlled by foreigners and is taxed as a corporation
A Multi-Member LLC that is taxed as a Corporation and that includes at least one foreign owner who owns 25% or more of the LLC is considered a foreign corporation.
The filing of Forms 5472 and 1120 is not necessary in the case of foreign-owned Multi-Member LLCs that are taxed as Partnerships.
IRS Form 5472 and a foreign-owned single-member limited liability company
If you have a Single-Member LLC (1 owner) that is owned by a foreign entity, you must submit Form 5472 and Form 1120 with the IRS on an annual basis.
The purpose of Form 5472 is to collect information.
This new Form 5472, as well as the accompanying rules, are intended to prohibit foreigners from dodging United States taxes and to remove several loopholes that previously existed in the tax system.
Ownership is divided into two categories: direct ownership and indirect ownership.
Form 5472 and Form 1120 requirements apply to foreign-owned single-member limited liability companies that are owned directly or indirectly by one or more of the following foreign entities:
Having a foreign individual or a foreign corporation as the owner is referred to as “direct ownership.”
Indirect ownership refers to the fact that the LLC is owned by another Disregarded Entity LLC, which in turn owns the Single-Member LLC.
If you have a more complicated business structure, you will need to consult with an accountant for guidance, since there are more intricate instances of indirect ownership that are outside the scope of this article.
The purpose of Form 5472 is to collect information.
This new Form 5472, as well as the accompanying rules, are intended to prohibit foreigners from dodging United States taxes and to remove several loopholes that previously existed in the tax system.
An overview of the procedures for single-member limited liability companies that are owned by foreign entities. The following are the conditions for foreign-owned single-member disregarded limited liability companies:
Obtain a Federal Employer Identification Number (EIN) (EIN).
Fill out Form 5472 as well as Form 1120. (only LLC name, address, and items B and E are required).
Make sure you have financial records to back up the facts on your Form 5472.
You may be required to file a 1040NR (Nonresident Alien Income Tax Return) and get an ITIN, depending on a variety of circumstances (including the nature of your company, your tax filing status, the nation in which you live, and US tax treaties) (Individual Taxpayer Identification Number).
After that, depending on the same conditions, you may not have any income from the United States and hence will not be required to submit a 1040NR or get an ITIN. You’ll need to consult with an accountant in order to establish your tax filing responsibilities in the United States. It is recommended that you send an email to Gary at GW Carter.
Non-Resident Alien (NRA) Status
What is the definition of a foreign person?
A foreign person (sometimes referred to as “foreign-owned”) is any of the following types of entity:
Foreign Company, Foreign Corporation, Foreign Partnership (or their U.S. Branches), Foreign Trust, Foreign Estate, and any other person who is not a U.S. Person are all considered non-resident alien individuals under the Immigration and Nationality Act.
The vast majority of our customers will be Non-Resident Aliens, and as a result, they will be treated as Foreign Persons for tax purposes in the United States.
This means that you are subject to the new reporting requirements for Foreign-Owned Single-Member LLCs, and you must submit Form 5472 and comply with all of the obligations that accompany it.
What does it mean to be a citizen of the United States?
A person who resides in the United States is any of the following:
Alien who is a citizen of the United States and resides in the country (determined by green card test or substantial presence test)
In addition, any estate that is not a foreign estate trust and satisfies specific standards, as well as any other person who is not a foreign person, are considered domestic corporations or domestic partnerships.
Non-Resident Alien vs. Resident Alien: What’s the difference?
In order to better understand the distinction between a Resident Alien and a Nonresident Alien, please refer to this IRS page: establishing the tax status of nonresident aliens.
Take-out is available (foreigner vs U.S. person)
Any foreign person who owns (directly or indirectly) a Single-Member LLC is required to submit Form 5472 as well as Form 1120 with the Internal Revenue Service.
A person residing in the United States who owns an LLC is exempt from filing Form 5472 and Form 1120.
Limited liability companies with many members
What about foreign-owned multi-member limited liability companies (LLCs)?
If you have a Multi-Member LLC that is taxed as a Corporation and at least one foreign owner who owns 25 percent or more of the company, you must submit Form 5472 and Form 1120 with the Internal Revenue Service.
If you have a Foreign-owned Multi-Member LLC that is taxed as a Partnership, on the other hand – and this is the most typical situation – you are not needed to submit Form 5472 and Form 1120. As a result, the Form 5472 and Form 1120 regulations do not apply to the vast majority of foreign-owned multi-member limited liability companies (again, those are taxed as a Partnership).
There’s a good reason for this: Multi-Member LLCs that are treated as partnerships by the IRS are deemed Domestic Partnerships by the IRS, and Domestic Partnerships are considered United States Persons, which means they must file a United States income tax return.
Multi-Member LLCs with foreign ownership must comply with the following requirements:
Form 1065, Informational Partnership Return, should be filed, and K-1s should be sent to each LLC member.
Each Member is responsible for completing and submitting a federal income tax return in the United States.
No Form 1065 and K-1 filing is required if the Foreign-owned Multi-Member LLC does not generate any revenue (and does not have any costs, deductions, or credits that it would want to claim).
Important: The above is a high-level summary of U.S. taxes for a foreign-owned Multi-Member LLC; however, the specifics are more complicated, and include who your LLC Members are, where your LLC is situated, how revenue is generated, and your U.S. tax filing obligations, among other things. For example, many foreign-owned MultiMember LLCs are required to submit Forms 8804 and 8805 in addition to their annual report. You will need to consult with an accountant in order to determine all of your tax filing obligations in the United States. The most recent update was made on July 22, 2020.
Who is required to file Form 5472?
Corporations that are subject to reporting, transactions that are subject to reporting, and related parties
It is possible that you may come across the following phrase when reading IRS instructions:
“Form 5472 must be submitted by Reportable Corporations that engage in Reportable Transactions with Related Parties,” according to the IRS.
Because there are so many “R” terms, let us define them.
Corporations that must be reported
According to Section 1.6038A-1 of the Internal Revenue Code, a foreign-owned single member disregarded entity LLC is treated as a Reportable Corporation. It makes no difference whether the LLC Member is a person or a corporation from another country. It remains a Reportable Corporation, though.
Also included in the definition of a Reportable Corporation is a foreign corporation that conducts commerce or business in the United States of America.
Parties with a common interest
Because Section 1.6038A-1(d) is written for corporations, the definition of a Related Party in that section can be a little difficult to comprehend (however, it still applies to Single-Member LLCs).
Here are some instances of who could be considered a Related Party to a Single-Member Limited Liability Company:
The proprietor of a limited liability company (LLC)
Parents, grandparents, brother, sister, spouse, and other relatives of the LLC owner
Other businesses owned (either directly or indirectly) by the LLC’s principal.
These are just a few frequent instances of Related Parties; however, there are many more sophisticated cases that are outside the scope of this article, including those that are discussed in greater detail elsewhere.
Your LLC is still permitted to do business with Related Parties; however, any transactions with Related Parties must be properly disclosed to the IRS.
We are unable to assist you in determining who is and isn’t a Related Party; nonetheless, we highly advise you to consult with an accountant who has experience working with foreign-owned LLCs before making any decisions. You may also look at the definitions of Related Parties in the following documents:
Section 267(b) and Section 707(b)(1) of the Code of Civil Procedure
IRS publication 550, Section 482 of the Internal Revenue Code
Transactions that must be reported
A Reportable Transaction is defined as the transfer or exchange of money (or property) between an LLC and its foreign owners that is subject to reporting requirements. Reportable Transactions include, but are not limited to, the following types of transactions:
A capital contribution is money that is put or invested into a limited liability company by a Related Party owner.
When an LLC pays or gives money to a Related Party, this is referred to as “capital distributions.”
Borrowings from the LLC or from the LLC to a Related Party made by the LLC’s owner
A Related Party’s payment to the State for the formation of the LLC, the dissolution (shutdown) of the LLC, or any filings with the State is considered a payment to the State.
Any financial transaction between the LLC and a Related Party, such as a sale, assignment, lease, licence, loan, advance, or donation, is considered a financial transaction.
Please keep in mind that, even though your U.S. LLC does not conduct business or trade in the United States, if you made a capital contribution to your LLC, you must still comply with IRS Form 5472 filing requirements.
The information provided above is a high-level summary of what a Reportable Transaction is and does not include all of the relevant cases. You will need to collaborate with an accountant to ensure that all Reportable Transactions are correctly documented.
Tax Treaties with the IRS and International Information Sharing
The Internal Revenue Service has tax treaties with more than 60 nations. This implies that the governments of those nations have agreed to exchange information about their tax-paying people in order to improve the collection of tax money in those countries.
An increasing number of foreign nations have entered into tax treaties with the United States. Under these treaties, residents (not necessarily citizens) of other nations are taxed at a lower rate or are excluded from U.S. taxes on certain items of income they receive from sources inside the United States, depending on the nature of the income. These lower rates and exemptions differ according on the country and the individual categories of income being exempted. Residents or citizens of the United States who receive certain items of income from sources inside other nations are taxed at a lower rate or are excluded from international taxes under the terms of these same treaties. In most income tax treaties, there is a provision known as a “saving clause,” which prohibits a citizen or resident of the United States from taking use of the terms of a tax treaty in order to avoid paying tax on income derived from sources in the United States.
The treaty does not cover a specific type of income, or if there is no treaty between your country and the United States, you must pay tax on the income in the same manner and at the same rates as described in the instructions for the applicable United States tax return, unless the treaty specifies otherwise.
Many of the different states in the United States impose taxes on income that is derived from sources inside their borders.
As a result, you should check with the tax authorities of the state from where you generate income to see if any state taxes are applicable to any of your earnings. Some states in the United States do not abide by the requirements of tax treaties with other countries.
Completing and submitting your tax forms
Forms must be completed and submitted.
It is important to note that the necessity to complete Form 5472 should not be taken lightly. The Treasury Department of the United States spends billions of dollars each year enforcing its rules against persons who are subject to reporting obligations in the United States.
Form 5472 must be submitted to the Internal Revenue Service with Form 1120. “Attached” simply indicates that Form 5472 has been filed with Form 1120.
Form 5472 and Form 1120 are due every year by April 15th for limited liability companies (LLCs) that handle taxes on a calendar year basis, from January through December (which is the most typically utilised period).
Example: If your LLC was established any time in 2020, you must complete Form 5472 and Form 1120 by April 15th, 2021 in order to avoid penalties.
Form 5472 may be downloaded here: https://www.irs.gov/pub/irs-pdf/f5472.pdf
Instructions for completing Form 5472 may be found at: https://www.irs.gov/instructions/i5472
Each Related Party is needed to submit a separate Form 5472.
As previously stated, each Related Party that engaged in Reportable Transactions with the LLC is required to file a separate Form 5472 with the SEC.
In addition, Form 1120 is necessary.
Note: Form 1120 is a tax return for corporations; however, under recent IRS laws, foreign-owned SingleMember LLCs are now obliged to file Form 1120.
Form 1120 may be downloaded here: https://www.irs.gov/pub/irs-pdf/f1120.pdf
Instructions for completing Form 1120 may be found at: https://www.irs.gov/instructions/i1120
When do Forms 5472 and 1120 need to be submitted?
Due to the fact that Form 5472 is submitted to the IRS alongside Form 1120, the due dates for both forms are the same as for Form 1120.
For tax reasons, most limited liability companies (LLCs) in the United States operate on a calendar year (January – December), rather than a fiscal year. Form 5472 and Form 1120 are due on April 15th each year for limited liability companies that operate on a calendar year basis.
The majority of filers will be subject to this deadline.
If, on the other hand, your LLC has a different fiscal year, please refer to the Form 1120 guidelines and specifically the “When to File” section. Example: If your LLC was established any time in 2020, you must complete Form 5472 and Form 1120 by April 15th, 2021 in order to avoid penalties.
Form 5472 should be sent to the following address:
Form 5472 must be sent to the Internal Revenue Service through mail or fax.
Please double-check that Form 5472 is connected to Form 1120. When you submit Form 1120 and Form 5472 to the IRS, “attached” merely implies that the Form 5472 is placed after the Form 1120.
To send a letter, write to the Internal Revenue Service at 1973 Rulon White Boulevard M/S 6112, Attn: PIN Unit, in Ogden, Utah 84201 (internal revenue [email protected]).
To send a fax, dial 855-887-7737.
Keep in mind to write “Foreign-owned U.S. DE” at the top of Form 1120 to indicate ownership.