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US: Domestic disregarded entities: New reporting rules in the US

Fuller-James
Forst-David

Jim Fuller

David Forst

The US Treasury and the Internal Revenue Service (IRS) have proposed regulations that would treat a domestic disregarded entity (DRE) that is wholly-owned by a foreign person as a domestic corporation separate from its owner for the limited purposes of the reporting, record maintenance and associated compliance requirements that apply to 25% foreign-owned domestic corporations under § 6038A.

The preamble states that these changes intend to provide the IRS with improved access to information that it needs to satisfy its obligations under US tax treaties, tax information exchange agreements and similar international agreements, as well to strengthen the enforcement of US tax laws.

Because the proposed regulations would treat the affected domestic entities as foreign-owned domestic corporations for the specific purposes of § 6038A, they will be reporting corporations within the meaning of § 6038A. Consequently, they will need to obtain employer identification numbers and will be required to file Form 5472 with respect to reportable transactions between the entity and its foreign owner or other foreign related parties.

To ensure that these entities report all transactions with foreign related parties, the proposed regulations specify an additional category for reporting transactions for these purposes within the meaning of Treasury Regulation § 1.482-1(i)(7). This proposed change will mean these entities will be treated as separate taxpayers for the purpose of identifying transactions and being subject to requirements under § 6038A) to the extent not already covered by another reportable category. The term "transaction" is defined in Treas. Reg. § 1.482-1(i)(7) to include any sale, assignment, lease, license, loan, advance, contribution, or other transaction of any interest in or a right to use any property or money, as well as the performance of any services for the benefit of, or on behalf of, another taxpayer.

For example, under the proposed regulations, contributions and distributions would be considered reportable transactions with respect to these entities.

The penalty provisions associated with failure to file Form 5472 and failure to maintain records would also apply to these entities.

If the proposed regulations are approved, the provisions will apply for taxable years that end on or after the date that is 12 months after the date the regulations are published as final regulations.

Jim Fuller (jpfuller@fenwick.com) and David Forst (dforst@fenwick.com)

Fenwick & West

Website: www.fenwick.com

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