The first form we will discuss in this blog series is Form 5472—Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade of Business. This form is required to be filed by U.S. corporations that have at least 25% foreign ownership and by foreign corporations that are engaged in a U.S. trade of business. It is an informational form that discloses the transactions the corporation has had throughout the tax year with foreign-related parties.
Penalties for failure to file Form 5472 can be severe. A penalty of $10,000 could be assessed on any reporting corporation that fails to file the form when due. Filing a substantially incomplete Form 5472 also constitutes a failure to file.
U.S. corporations with 25% or greater foreign ownership
A corporation is 25% foreign owned if it has at least one direct or indirect 25% foreign shareholder at any time during the year. When required, a separate Form 5472 must be filed for each foreign shareholder who is a 25% or greater owner of the U.S. corporation.
Form 5472 must be filed when the corporation has a reportable transaction with the foreign shareholder. In general, most transactions with foreign shareholders are considered to be reportable. Some examples of reportable transactions include sales, rents, royalties, and interest. The payment of dividends is not included as a reportable transaction.
The form requires the following information with regard to each 25% or greater shareholder: name, address, country of citizenship, the nature and amount of the reportable transaction, name of the country under whose laws the foreign shareholder files an income tax return, and the names of the countries where that shareholder conducts business.
Foreign corporations engaged in a U.S. trade of business
When a foreign corporation engaged in a U.S. trade or business has a reportable transaction with either a U.S. or a foreign-related party, Form 5472 is required to be filed. The purpose is to disclose the nature and amount of foreign and domestic transactions that occur with related parties.
But what constitutes engaging in a U.S. trade or business? This is not clearly defined by the Internal Revenue Code or the Treasury Regulations. However, the IRS has taken a position that activities beyond the mere passive receipt of income, if conducted in the United States, are sufficient to be considered engaging in a U.S. trade or business.
There are some exceptions to filing this form; you should seek professional advice regarding those exceptions. Due to the complexity of the form and the severity of the penalties for not filing, it is best to consult your tax advisor on the international issues associated with Form 5472.