U.S.-disregarded entities that are owned by a foreign person would be treated as domestic corporations under proposed regulations issued on May 6 by the IRS.

The proposed new rules would apply for purposes of the reporting, record maintenance, and other compliance requirements that apply to 25% foreign-owned domestic corporations. These changes are intended to provide the IRS with improved access to information that it needs to satisfy its obligations under U.S. tax treaties, tax information exchange agreements and similar international agreements, as well as to strengthen the enforcement of U.S. tax laws.

Annual filings

The proposed rules would require the disregarded entities annually to file Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business,” and to maintain records sufficient to establish the accuracy of the information reported on their federal tax returns. They also would be required to obtain an Employer Identification Number (EIN) by filing an application that includes responsible-party information.

Disregarded entities are required to report all transactions with foreign related parties. The term “transaction” is defined to include any sale, assignment, lease, license, loan, advance, contribution, or other transfer 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.

Other steps to fight offshore tax evasion

Separately on May 5, the U.S. Treasury Department announced proposed other legislation that would help further counter money laundering and corruption as well as combat tax evasion.

Specifically, it proposed beneficial ownership legislation that would require companies to know and report adequate and accurate information about the real person behind a company at the time of the company’s creation. That information would be made available to law enforcement. The proposed draft legislation has been sent to Congress.

In a letter to Speaker of the House Paul Ryan, U.S. Treasury Secretary Jacob Lew urged Congress to swiftly pass beneficial ownership legislation. “These regulations implement a common-sense requirement so that financial institutions know who actually owns the companies that make use of their services (the ‘beneficial owner’),” he wrote.

“Criminals are currently able to misuse companies to hide this beneficial owner, significantly weakening our ability to fight financial crime,” Lew added.

Down the road

The proposed regulations on disregarded entities would apply to tax years ending on or after the date that is 12 months after they are published as final regulations.

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