Form 5472 is a taxpayer return for US corporations with reportable transitions that are at least 25% foreign-owned or have 25% foreign corporation engagement.

Form 5472 is a United States Taxpayer’s return for: 

  1. Any U.S. corporation that is at least 25% foreign-owned or
  2. Any U.S. corporation that has at least 25% foreign corporation engagement in a U.S. trade or business. 

If a corporation has at least one direct or indirect foreign shareholder in one tax year that holds at least 25%, it is considered foreign owned. Foreign shareholders are considered to be any foreign person who holds 25% or more of the corporation’s voting power or stock.

IRS defines a foreign person as: 

  • “An individual who is not a citizen or resident of the United States;
  • An individual who is a citizen or resident of a U.S. possession who is not otherwise a citizen or resident of the United States;
  • Any partnership, association, company, or corporation that is not created or organized in the United States;
  • Any foreign estate or foreign trust described in section 7701(a)(31); or
  • Any foreign government (or agency or instrumentality thereof) to the extent that the foreign government is engaged in the conduct of a commercial activity as defined in section 892.”

However, the term “foreign person” does not include any foreign person who consents to the filing of a joint income tax return.

Who files Form 5472?

Corporations that have reportable transactions with foreign or domestic related parties must file Form 5472. The exception for U.S. corporations that are 25% foreign-owned but don’t have to fill out form 5472 are businesses that do not have reportable transactions. 

Determining direct, indirect, and constructive ownership can be a complicated matter. For example, if you – a foreign individual – own 10% of a US Corporation and another US business that you are related to own 15% of the same US Corporation, then you might be considered the owner of those 15% shares, which will, in turn, cause the US Corporation to be 25% foreign-owned. 

Be sure to talk to an experienced international tax attorney to discuss indirect and constructive ownership rules that could affect your business.

According to IRS, the following exempt a corporation from filing form 5472:

  1.  “It had no reportable transactions of the types listed in Parts IV and VI of the form.
  2. A U.S. person that controls the foreign related corporation files Form 5471 for the tax year to report information under section 6038. To qualify for this exception, the U.S. person must complete Schedule M (Form 5471) showing all reportable transactions between the reporting corporation and the related party for the tax year. This exception does not apply to foreign-owned U.S. DEs.
  3. The related corporation qualifies as a foreign sales corporation for the tax year and files Form 1120-FSC. This exception does not apply to foreign-owned U.S. DEs.
  4. It is a foreign corporation that does not have a permanent establishment in the United States under an applicable income tax treaty and timely files Form 8833.
  5. It is a foreign corporation all of whose gross income is exempt from taxation under section 883 and it timely and fully complies with the reporting requirements of sections 883 and 887.
  6. Both the reporting corporation and the related party are not U.S. persons as defined in section 7701(a)(30) and the transactions will not generate in any tax year:
  • Gross income from sources within the United States or income effectively connected, or treated as effectively connected, with the conduct of a trade or business within the United States; or
  • Any expense, loss, or other deduction that is allocable or apportionable to such income.”

What are the Form 5472 Instructions

U.S. corporations must list reportable transactions on the form. Reportable transactions include any type of monetary transaction whether paid or received between foreign parties and the corporation and the tax year such as:

 

  • Sales of stock in trade
  • Sales of tangible property other than stock
  • Platform contribution transaction payments received
  • Cost-sharing transaction payments received
  • Rents received
  • Royalties received
  • Sales
  • Leases
  • Licenses of intangible property rights (things such as patents, trademarks, etc.)
  • Technical, managerial, engineering, construction, scientific or like services
  • Commissions received
  • Amounts borrowed
  • Interest received
  • Premiums received for insurance or reinsurance
  • Purchases of stock in trade
  • Purchases of tangible property

 

In addition to reportable transactions, Form 5472 requires an Employer Identification Number (EIN). 

When to file form 5472 

U.S. corporations who have reportable foreign transactions must file form 5472 at the same time as their annual tax returns. Unlike other tax forms, this one must be mailed or faxed to IRS. 

Corporations requesting an extension of time to file form 5472 must file Form 7004 by the due date of the return. 

Are there penalties for not filing Form 5472? 

IRS can fine corporations $25,000 for failing to file form 5472, filing it late, or filing it incorrectly. The agency will fine corporations an additional $25,000 if the corporation does not fix any IRS findings after 90 days of notification. 

Curious how to avoid triggering an IRS audit? Read our article about what triggers an IRS audit here. 

Form 5472 is a tax filing form for U.S. corporations who are 25% owned by foreign entities

Form 5472

One important aspect of being a business owner is ensuring that you keep up with changing laws and regulations that may be applicable to your business. There are consistent changes and updates being made to various legal requirements and ignoring those changes or failing to recognize them could result in negative consequences for your business. 

One ruling that business owners should be sure to maintain awareness of is the need to complete and file Form 5472. 

Who must file Form 5472? 

Form 5472 must be filed by any business owner that has a foreign owner or foreign shareholders of 25% or more of the company. Form 5472 is used by IRS to understand global transactions and transfer pricing issues between domestic and foreign-related parties. 

The requirement for eligible business owners to file this form began in 2017. It should be noted as well that this form should be filed by the corporation rather than the individual or shareholders themselves. 

What happens if I don’t file Form 5472 and am supposed to?

New laws enacted in 2017 significantly increased penalties related to not appropriately filing. Penalties include fines of between $10,000 to $25,000. These penalties may be enacted both for failure to form or filing in an incomplete manner. Penalties may also be charged for failing to maintain adequate records. 

Form 5472 Foreign Owned Company Filings

What do I need to report on Form 5472? 

All reportable transactions must be included in the submission of Form 5472. Reportable transactions are broadly defined by IRS as:

  • Any type of transaction listed in Part IV (sales, rent, etc.) for which monetary consideration was the sole consideration paid or received during the reporting corporation’s tax year
  • Any type of transaction or group of transactions listed in Part IV, if:
    • Any part of the consideration paid or received was not monetary consideration 
    • Less than full consideration was paid or received

To put this information in simpler terms, if you receive any money from, pay any money to, or pay anything on behalf of an eligible LLC, you must file For 5472. 

How do I file Form 5472? 

It should be noted that in order to file Form 5472, you must have an Employer Identification Number (EIN). Once your EIN is obtained, you can file Form 5472. Unlike many other forms, Form 5472 cannot be filed electronically. It must be filed and submitted by paper or fax. 

While IRS provides specific instructions on how to complete the filing of Form 5472, the instructions are complex and may be confusing for many. 

If you’re concerned about your Form 5472 being filed correctly, our team of experts at Milikowsky Tax Law may be able to support you. Avoid penalty charges by ensuring that your filings are completed correctly the first time. In the event that you do face penalties, we are prepared to help keep them to a minimum and make necessary adjustments. Call or contact us today to get started. 

International business

Perception of the requirements for IRS Form 5472 for foreign businesses are influenced by the globalization of the economy. In the tech world we currently live in, the internet has almost eliminated country boundaries and has allowed foreign business to sell their products and goods all over the globe. This ease of access and globalization has led a multitude of entrepreneurs to leave the comfort of their homes and their countries to bring their products and services to the United States.
Starting a business in the US has several legal and tax implications, which foreign business owners must be aware of. Besides the regular forms every US business must file with the IRS, those with foreign owners have additional filing requirements.
Form 5472 is an information return that must be filed by a US corporation that is 25% owned by a foreign shareholder or a foreign corporation that is involved in a US trade or business, if, and only if, the US Corporation has had a “reportable transaction.”

Who Must File Form 5472?

Form 5472 must be filed by either 1) a US Corporation that is 25% (or more) owned by a foreign shareholder or 2) a foreign corporation that is engaged in a US trade or business. A corporation is 25% foreign owned if it is directly, indirectly or constructively owned by a foreign person.
A foreign person is an individual without citizenship or legal permanent residency of the United States. It could also be a foreign business (i.e., created and organized outside of the US), a foreign trust or a foreign estate.
Determining direct, indirect and constructive ownership can be a complicated matter. For example, if you – a foreign individual – own 10% of a US Corporation and another US business that you are related to own 15% of the same US Corporation, then you might be considered the owner of those 15% shares, which will in turn cause the US Corporation to be 25% foreign-owned. Be sure to talk to an experienced international tax attorney to discuss indirect and constructive ownership rules that could affect your business.

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Form 5472 Requirements

Form 5472 requires the filer to disclose the foreign shareholders’ names, addresses and country of citizenship, organization or incorporation, principal business activity and details on the transactions with each foreign shareholder.
What Is A Reportable Transaction For Form 5472?
Not all US corporations that are 25% foreign-owned or foreign businesses engaged in a US trade or business are required to file Form 5472. Only those businesses with “reportable transactions” are required to file Form 5472.

What Is Considered A Foreign Transaction or A Reportable Transaction?

A reportable transaction is listed on Form 5472 in Part IV and is a monetary transaction (paid or received) between the foreign party and reporting corporation during that tax year. Some of these include: sales of stock in trade, sales of tangible property other than stock, platform contribution transaction payments received, cost sharing transaction payments received, rents received, royalties received, sales, leases, licenses of intangible property rights (things such as patents, trademarks etc), technical, managerial, engineering, construction, scientific or like services, commissions received, amounts borrowed, interest received, premiums received for insurance or reinsurance, purchases of stock in trade, purchases of tangible property, among others. Be sure to check the instructions for Form 5472 (https://www.irs.gov/pub/irs-pdf/i5472.pdf) and talk to your tax professional and tax advisor to determine if you have any reportable transactions that need to be disclosed on Form 5472.

Filing Deadlines For Form 5472

Form 5472 is filed with the U.S. Corporation’s federal income tax return (1120) or with the Foreign entity’s return (1120-F), including any extensions.

What’s New on Form 5472

The new regulations were updated by the IRS in December of 2017. They extend the filing requirements of Form 5472 to include foreign-owned disregarded entities. A US disregarded entity is one (usually, a single-member LLC) that has no income tax return filing of your own. The foreign owner must file a pro forma Form 1120 with Form 5472 attached to it to report any reportable transactions it had with the US entity.
Failure To File
As with any other information return, it is very important to file Form 5472 timely and correctly. Failure to file or filing an incomplete or incorrect return can result in a penalty of $25,000 on the reporting corporation (or disregarded entity). An additional $25,000 penalty can also be imposed if the reporting entity does not file Form 5472 after it has been notified by the IRS. Besides monetary penalties, criminal penalties may also be applied.
If you were required to file Form 5472 and have failed to do so, the tax professionals at Milikowsky Tax Law can assist you determine if you could file a delinquent Form 5472 and request a penalty abatement or if you qualify under the Streamlined Domestic/Foreign Offshore Procedures.

Being a foreign shareholder of a US Corporation/Disregarded Entity or being a foreign entity doing business in the US can result in overwhelming tax filing requirements. Failure to comply with such requirements can result in severe penalties. Do not try to navigate the complicated realm of international taxation alone. Call us today to assist you determine your filing requirements or to assist you become compliant with all US tax laws.