The United States receives the most Foreign Direct Investment – FDI globally. In the first quarter of 2023 alone, it received USD 109 billion in FDI. A testament to the fact that it is the country with the most foreign-owned businesses/owners/shareholders.

For such businesses, their tax filing involves a different approach as they are required to file IRS Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. This is in line with sections 6038A and 6038C of the Internal Revenue Code. If you have clients whose businesses fall under this category, it is essential to have knowledge about filing form 5472.

What is IRS Form 5472?

Form 5472, known as Information Return, is a mandatory tax form for reportable transactions between a reporting corporation and its foreign related party. A reporting corporation refers to:

  • US corporations, 25% owned by a foreigner
  • Foreign-owned disregarded entities (they are also treated as corporations in line with section 6038A)
  • Foreign-owned corporations operating in the United States.

According to the IRS, 25% foreign-owned corporations refer to a business entity with one or more direct or indirect 25% shareholders. Such a shareholder possesses either 25% of all voting power for all stocks entitled to vote or 25% of the total value of all classes of stock of the corporation.

The US government uses Form 5472 to keep up with the financial activities between the corporations in question and every one of their foreign shareholders. This is why, when filling this form, each foreign stakeholder or related party involved in a reportable transaction needs to fill the form separately. So, if your client has more than one foreign shareholder having a 25% individual stake in the company, you’ll have to obtain multiple forms.

Note: There is also Form 5471, a similar version of this form, which applies to US citizens who are shareholders in foreign corporations.

Purpose of Form 5472

The first and most obvious benefit of this form is to ensure foreign businesses operating in the US comply with US tax laws, not evading taxes. The transparency benefit also ensures corporations are open with the government about their organizational structure, yearly transactions and income.

Next, Form 5472 helps reduce the chances of money laundering, this time from foreigners and even American citizens using such corporate entities as a front to engage in illegal financial transactions. Finally, with this form, companies will have fewer chances to claim tax exemptions they are not qualified for.

You may be interested in:

IRS Form 5472 instructions for filing.

When You Should File Form 5472

You are required to use Form 5472 to report transactions between the reporting corporation and its related foreign parties. These transactions are:

  1. Any transaction that involves the exchange of money.
  2. Payments made to the foreign entity.
  3. Sales and Purchases of Goods
  4. Loans
  5. Interests
  6. Any other transaction between the corporation and the foreign entity not covered in the form
  7. Rents received and paid
  8. Royalties received and paid
  9. Sales, leases, licenses, etc., of intangible property rights (for example, patents, trademarks, secret formulas)
  10. Purchases, leases, licenses, etc., of intangible property rights (for example, patents, trademarks, secret formulas)

Exemptions to filing Form 5472

Under certain circumstances, the US tax law exempts a reporting corporation from filing Form 5472 within a tax year. This could be for any of the following reasons:

  • There were no reportable transactions of the types listed in Parts IV and VI of the form, and, in the case of a foreign-owned U.S. DE, they also had no reportable transactions of the type listed in Part V of the form.
  • A U.S. person who controls the foreign-related corporation files Form 5471 for the tax year to report information under section 6038. This does not apply to Foreign-owned Disregarded entities.
  • The related corporation qualifies as a foreign sales corporation for the tax year and files Form 1120-FSC. Again, this does not apply to foreign-owned U.S. Disregarded Entities.
  • 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.
  • It’s a foreign corporation 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.
  • 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 be generated 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.

PS: A foreign-owned multi member LLC is not regarded as a corporation. Instead, it’s considered a Partnership and exempted from filing Form 5472.

Download the IRS Form 5427 Checklist Template

Penalties for Not Filing Form 5472 (Non-compliance)

Reporting corporations that fail to file form 5472 as at when due or submit incomplete form attracts a fine of $25000. An extra 90 days of non-compliance after notification from the IRS comes with an additional fee of $25000.

Criminal penalties under sections 7203, 7206, and 7207 may also apply for failure to submit information or for filing false or fraudulent information.

The way around this is with Penalty Abatement. Your client can request penalty abatement for a reasonable cause and have their penalty reduced or eliminated. This works in instances where the form couldn’t be filed or filed correctly due to the death or sickness of a person needed in the form filling, natural disasters, inability to obtain the correct information and other select reasons. In this case, your duty as the Accountant is to have your client send a statement to the IRS with the details that back up the reasons for defaulting.

Filing Form 5472 for Clients

We cover Form 5472 instructions for filing in detail here.

Form 5472 consists of three pages and eight parts, to be filled with details about the corporation’s activities over the past business year and about the foreign stakeholder with 25% ownership of the company. However, to be on the safe side, businesses often enlist tax advisory services or professional help from Accountants, which is where you come in.

Here’s what the latest version of the form, which was revised in December 2022, looks like:

snapshot of IRS form 5472

So, for the best results for your clients, here’s a breakdown of the form and how to go about filling it:

  • Part I – Reporting Corporation: this requires the corporation’s name, address, Employer Identification Number(EIN), cost of total assets, date and country of incorporation,
  • Part II – 25% foreign shareholder: here, the concerned party is to provide their name, address, US identifying number, Reference number, principal country of business operation, country of citizenship or incorporation, country where the foreign shareholder files an income tax as a resident
  • Part III – Related Party: requirements for this section are almost the same as the ones given for Part II. The difference is that the related party will have to tick a box indicating their relationship is with the corporation or foreign shareholder.
  • Part IV – Reported transactions: this part is a breakdown of the different kinds of monetary transactions between the parties involved during the business year.
  • Part V – Reportable Transactions of a Reporting Corporation That Is a Foreign-Owned U.S. DE: this section is self-explanatory, but you’ll need a separate sheet to attach to the form breaking down the transactions in question.
  • Part VI – Nonmonetary and Less-Than-Full Consideration Transactions Between the Reporting Corporation and the Foreign-Related Party: the same rule of separate sheet submission of part V applies here too.
  • Part VII – Additional Information: this is for the reporting corporation to complete by providing a Yes/No answer to specific questions on business transactions within the tax year.
  • Part VIII – Cost Sharing Arrangement (CSA): this is for the reporting corporation to share details about the cost-sharing arrangements(if any) it got into during the tax year
  • Part IX – Base Erosion Payments and Base Erosion Tax Benefits Under Section 59A: the reporting corporation has to share the amounts within the tax year that fall under the base erosion payment and tax benefits.

Form 5472 is submitted with a complete Form 1120-F for foreign LLCs. U.S. Corporation. It’s called an Income Tax Return and is used for reporting the income, gains, losses, deductions, and credits and to figure the income tax liability of a corporation.

The deadline for filing Form 5472 is April 15 every year, so at the time of writing this piece, the deadline is April 15 2023. However, it can still be filed with an extension till October 15th by using Form 7004. Hence, the final date for completion and submission is October 15th 2023.

Final Thoughts

With all we’ve described above, you have enough information to help your clients file their taxes correctly using Form 5472. But if you need more help with your accounting practice, Financial Cents can help you automate your tasks and meet clients’ needs. Sign up today to get started.