The Use of a US LLC: Smart Move or Poison Chalice for Foreign Persons?
By Darlene F. Hart, US Tax & Financial Services Group Ltd.
The filing requirements and practical application of US LLCs for foreign owners may force many foreign nationals to reconsider their options. As of 01 January 2017, limited liability companies (LLCs) formed in the United States that are treated as disregarded entities and wholly owned by foreign persons, are subject to new IRS reporting requirements.
Such foreign-owned US LLCs must file IRS Form 5472 if there are transactions between the direct or indirect owners of the US LLC and the LLC itself. The IRS is asking for the tax-resident status of the direct and indirect owners of US LLCs, including information on the amount of cash or assets transferred to or from them. Form 5472 is not an income tax return, it is merely an information return which must be filed annually, but failure to file this form can result in a USD 25,000 penalty.
Currently, Form 5472 is for information-sharing purposes within the IRS. In the future, however, this information may also be shared with other countries. As Form 5472 ties direct and indirect owners with their tax-resident status and offshore assets owned by these US LLC’s, the IRS will have more information to share with other government authorities who will be interested in obtaining such information on their tax residents.
US LLC’s are typically considered corporate entities in foreign jurisdictions and must have tax resident status somewhere in the world.
The circumstances surrounding movement of capital or assets between a US LLC and its owners, especially across multiple jurisdictions, can be complicated. Most foreign jurisdictions look to where the management and control of these entities occurs to determine tax resident status: Where is the direct owner tax resident? Where is the indirect owner tax resident? Add to that, most foreign countries do not recognize the flow-through status of a US LLC. Clear advise should be sought regarding the tax resident status of each LLC and each LLC should pay for any expenses incurred as a result of the ownership of various assets.
Darlene F. HartGGI member firm
US Tax & Financial Services Group Ltd.
London, UK, Zurich, Switzerland
T: +44 20 7357 8220
Darlene F. Hart is the founder of US Tax & Financial Services (est. 1986). With offices in London, Zurich, and Geneva, and clients in over 30 countries, the firm provides US tax advice and planning, and compliance services for individuals, partnerships, corporations, trusts, and estates around the world. Darlene continues to help private clients get compliant with their US tax obligations and also advises banks, financial institutions, and trust companies. Darlene works mainly from the office in Zurich.
Published: International Taxation Newsletter, No. 11, Autumn 2019 l Photo: kreativ4insider.com - stock.adobe.com