Background: Foreign, Domesticated SMLLCs. Foreign charitable organizations and pension funds (hereafter, “exempts” due to their tax-exempt status under home country, and in some cases, U.S. tax laws) may use separate legal entities as subsidiaries to hold institutional funds or plan assets in foreign and domestic jurisdictions. Organizational Structure of SMLLCs. These subsidiaries may be organized as single-member limited liability companies (“SMLLCs”) under the laws of a U.S. jurisdiction, such as Delaware, which permits “domestication”, or in other words, incorporation under State law of such foreign entities. Income Tax Structure of SMLLCs. Under Treasury “check-the-box” regulations for determining the U.S. tax status of an individual or entity, SMLLCs may not be corporations per se, or entities that generally must be recognized for tax purposes, or in other words, be taxpayers in their own right as opposed to income passing through to the shareholders, under foreign jurisdiction laws. December 2016 Final Regulations Change Tax Reporting Status of SMLLCs. SMLLCs may be pass-through for income tax purposes under foreign country and U.S. laws, but under final Treasury regulations published on December 13, 2016 (81 Fed. Reg. 89,849 (Dec. 13, 2016)) are subject to U.S. tax reporting and record maintenance requirements. General Overview of IRS Reporting and Record-Keeping Rules Applicable to SMLLCs. Form 5472. IRS regulations promulgated under section 6038A of the Internal Revenue Code of 1986, as amended (“Section 6038A) require SMLLCs to file IRS Form 5472 for each taxable year in which the SMLLC engages in a reportable transaction with the foreign exempt parent entity or a related party, determined under IRS ownership attribution rules. No De Minimis Exemption. By contrast to reporting corporations subject to Section 6038A , which are recognized for U.S. tax purposes, there is no de minimis exemption for an SMLLC with respect to gross revenue or a transaction amount which would trigger the filing and record-keeping requirements. Related Party and Reportable Transaction Disclosures. As a reporting corporation, the SMLLC must enumerate all related parties, with which it engaged in transactions for the taxable year, and disclose detailed information regarding direct and indirect monetary and non-monetary transactions with the foreign parent entity for that tax year. Record Maintenance Requirements. The SMLLC as a reporting corporation, as a general rule must retain certain records as provided in the Section 6038A regulations, to the extent they may be relevant to determine the correct U.S. tax treatment of transactions with related parties. The regulations permit the foreign related party to maintain some of the required records outside the U.S. IRS Penalties for Noncompliance With Section 6038A. The SMLLC may be subject to an annual $10,000 IRS penalty and additional $10,000 penalties accruing for applicable tax years with respect to each related party for failure to comply with Section 6038A rules. Practical Implications for Foreign Owners of SMLLCs. Foreign exempts, as well as foreign business entities using SMLLCs must be cognizant of and ensure compliance with these reporting and record-keeping rules to avoid significant IRS penalties. For assistance with tax planning and minimizing related compliance burdens in light of the additional U.S. tax requirements applicable to foreign, domesticated SMLLCs, filing of Form 5472 and record maintenance requirements or related questions, contact the author by e-mail at email@example.com or by phone at (646) 722-3370.
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