New This Year: Form 5472 for U.S. LLCs
Nonresidents (human and otherwise) who own assets in the United States may face a new paperwork requirement, starting this year.
Nonresidents who own 100% of U.S. limited liability companies are now required to file Form 5472.
Form 5472 tells the U.S. government the name of the ultimate beneficial owner, and reports transactions between the LLC and related people.
This new requirement exists so the U.S. government can collect information about you, in order to share it with the government of your home country.
For most people, the first time they will need to file this form is in 2018, for the 2017 calendar year.
Your Data Will Be Used Against You
There is no such thing as privacy. Governments worldwide want to know everything about you. Knowledge is power. Power over you.
Here is what the Department of Treasury said when publising the final rules:
This information [collected on Form 5472] will enhance the United States’ compliance with international standards of transparency and exchange of information for tax purposes and will strengthen the enforcement of U.S. tax laws.1
Let me translate. The United States will collect information about nonresidents with U.S. assets. This will help the U.S. collect more income tax, and will give the U.S. some data to use as bargaining chips in order to extract data from other countries.
The Triggers for Filing Form 5472
Form 5472 is required (in the new rules) when:
- A foreign person
- Is the sole owner of a U.S. limited liability company
- And certain types of transactions happen between the limited liability company and a “related party”.
I am not going to write about the technical elements required. My objective is to tell you enough so you can decide whether you might have a problem.
If you are aware of the risk, you can ask your favorite international tax lawyer2
if this new rule applies to you.
Example: Real Estate Holding Structures
Make it real. Here is an example of how we set up LLCs for nonresident clients who make U.S. real estate investments.
Nonresidents who buy U.S. real estate will often use a holding structure that looks like this:
- A foreign irrevocable trust
- Owns a Delaware limited liability company
- That owns U.S. real estate.
Mr. Big creates the trust and puts cash into it. The beneficiaries are Mrs. Big and the Big children. It is an extremely normal estate planning device.
The irrevocable trust provides tax benefits:
- No U.S. estate tax is imposed when any member of the Big family dies.
- Capital gain is taxed at long-term capital gain tax rates.
The limited liability company exists mostly for administration and management purposes. It is relatively easy to open a U.S. bank account for a domestic limited liability company. This bank account is used to pay the expenses associated with the real estate.
The U.S. real estate might be a home for personal use by the family, or it might be investment property.
Tax Reporting, Then and Now
Let’s use the simple scenario. The trust owns a vacation home that the family uses when they are in the United States.
How It Used to Be
Up until now, there would be no U.S. tax reporting for this structure:
- The trust has no income, so there is no reason to file a U.S. income tax return for the trust.
- The limited liability company has no income, so there is nothing to report for it, either.3
In other words, the U.S. government would receive no tax filings showing the ultimate owners of the real estate until the year in which the property was sold.
What It’s Like Now
Now, for this structure, the limited liability company will file Form 5472 to report financial transactions between it and related parties.
The financial transactions can be of any amount. Even paying the costs to form the limited liability company will be a sufficient trigger to make Form 5472 be required.
This means that in every year that money moves in or out of the limited liability company, Form 5472 is filed. The form reports the identity of the owner, and reports the details of the financial transaction. Who put the money into the company?
Discretely and quietly owning a U.S. real estate asset is no longer possible.
Preventing Form 5472
What if you do not want to file this form? What if you would rather not disclose your identity to the United States government?
The effective date for these rules has a curious definition:
[T]hese regulations . . . apply to taxable years of entities beginning on or after January 1, 2017, and ending on or after December 13, 2017.
For most people, the fiscal year for tax purposes of the limited liabliity company will be a calendar year. The fiscal year started on January 1, 2017.
But look at that second requirement: the fiscal year for tax purposes (the “taxable year”) of the LLC must end on or after December 13, 2017.
What if you dissolve your limited liability company before December 13, 2017?
Let’s pretend that you dissolve the LLC on May 31, 2017. Its fiscal year started on January 1, 2017 and ended on May 31, 2017.
The new rules do not apply to the LLC, because the new rules apply to LLCs whose taxable years:
- Start on or after January 1, 2017, AND
- End on or after December 13, 2017.
For real estate holding structures, it is perfectly feasible for a trust to own U.S. real estate directly — with no limited liability company. Trustees need to be educated. Trustee fears need to be placated.
But direct ownership will solve the reporting problem. The trust will not file a U.S. income tax return because it has no income to report, until the year of sale. At that point, the beneficiaries’ identities will be revealed because they will receive income distributions.
That’s one idea for eliminating the Form 5472 filing requirement.
There are unavoidable and mandatory recordkeeping requirements4
that must be satisfied for the U.S. LLCs to which these new rules apply.
The usual $10,000 penalty applies if you do not file Form 5472 when it is required.
Here’s what I suggest:
- Examine your life to see if U.S. limited liability companies have this new Form 5472 filing requirement applied to them.
- If the answer is yes, look immediately for help in restructuring your asset holdings to eliminate the filing requirement. Ask for help from someone who knows this stuff. (Hello!)
- Do not delay. Trustees, for instance, are often slow to act, because they are risk-averse by design and consider everything carefully before acting.