Foreign Owners’ Guide to Form 5472

What is Form 5472, and Who Needs to File?

Form 5472 is an Informational return for a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation engaged in a U.S. trade or business. Under sections 6038A and 6038C, Form 5472 is to be filed if there are reportable transactions between the reporting corporation and any foreign or domestic related party.

Form 5472 is to be filed together with the reporting corporation’s Income Tax Return as an attachment, when the Corporate Tax Return or Form 1120 is due.

What are the penalties for not filing Form 5472

It is very important to know if you will be subjected to penalties, as the IRS will always want any reporting  requirement to be filed correctly and on  time.  In  connection, the  IRS  has automatic penalties for late and incomplete filing of Form 5472. The penalty for late and incomplete filing of Form 5472 before the taxable year 2018 is $10,000 per form, while it increased after that. The existing penalty for late and incomplete filing of Form 5472 is $25,000 per form, starting after tax year 2018. The penalty is per form, because each set of Form 5472 will need to be filed for every related party with reportable transaction for every tax year.

To file Form 5472, the following qualifications must be met:

The Reporting Corporation
The reporting corporation can be either a U.S. corporation or a Foreign corporation with the following qualification:

1. A U.S. corporation is a reporting corporation if a single foreign person or company has at least 25% ownership (directly or indirectly).It is important to note that this qualification is only applicable to Corporations, Partnerships are not required to file Form 5472.
2. A U.S. Foreign owned disregarded entity (FODE) is also a reporting corporation.  A Foreign owned disregarded entity is an LLC owned by a single person or entity.
3. A  Foreign  Corporation  can  only  be  a  reporting  corporation  if  it  is  engaged  in  trade  or business within the United States.

The Related Party

The related party can be:

1. The foreign shareholder of the reporting corporation with at least 25% ownership.
2. A  person  or  company  related  to  the  reporting  corporation  under  Section  267(b)  or 707(b)(1)).
3. A  person or  company related  to  the  25%  foreign  shareholder  under Section  267(b)  or 707(b)(1)).
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   Some of the examples of related parties under Section 267(b) are the following:
   - Family members of the foreign shareholder.
   - A sister company of the reporting corporation.
   - A partnership owned by more than 50% of the foreign shareholder.
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4. Any other company related to there porting corporation under Section 482. Example is two or more business entity owned or controlled by the same person or company, directly or indirectly.

What is the definition of a Reportable Transaction?

A reportable transaction is any transaction listed in the Part IV of Form 5472 which:

1. Resulted to a monetary consideration paid or received by the reporting corporation during the taxable year.
2. It is a reportable transaction if part of the consideration paid or received by the reporting corporation is not a monetary consideration.
3. It is also a reportable transaction even if the consideration paid or received by the reporting corporation was less than the full consideration.

It is also important to note that if the related party is a U.S. person/company, the reportable transactions need not be reported on Part IV or Part VI of Form 5472.

The following are the reportable transactions listed in Part IV of the Form 5472*:

• Purchases/Sales of stock in trade (inventory).
• Purchases/Sales of tangible property other than stock in trade.
• Platform contribution transaction payments received/paid. An example of this is when the reporting  corporation is acting as a collecting  agent to a foreign related party or vice versa, using Stripe.
• Cost-sharing transaction payments received/paid.
• Rents/Royalties received/paid (for other than intangible property rights).
• Purchases/Sales, leases, licenses, etc., of intangible property rights.
• Consideration received/paid for technical, managerial, engineering, construction, scientific, or like services.
• Commissions received/paid.
• Amounts borrowed/loaned.
• Interest received/paid.
• Premiums received/paid for insurance or reinsurance.
• Other  amounts  received/paid. This  portion  is  for  the  reportable  transaction  that  is  not enlisted from #1-11, but still affects the reporting corporation’s taxable income for the taxable year.

Exceptions to filing 5472

The I-III above is the checklist to identify if the company is required to file Form 5472 in attachment to the Annual Federal Tax Return. However, there are still exceptions. The following instances exempt a reporting corporation from filing Form 5472:

1. If there are no reportable transactions to be reported in Part IV and Part VI of the form.
2. If the reportable  transaction is between the US corporation and a foreign subsidiary, wherein the U.S. corporation owns more than 50% or has control over the foreign subsidiary. A U.S. corporation who controls a foreign subsidiary is required to file Form 5471 and the same Part IV in Form 5472 is also reported in Schedule M of Form 5471. So, to avoid repetition of the report, Form 5472 is not required from a reporting corporation in this instance.  This exemption is not applicable to U.S. Foreign-owned disregarded entities.
3. If the reporting corporation is a Foreign Sales Corporation and files Form  1120-FSC instead of the regular Form 1120. This exemption is also not applicable to U.S. Foreign-owned disregarded entity.
4. If the reporting corporation is a Foreign corporation without any permanent establishment in the United States under an existing tax treaty of the foreign corporation’s country and the USA.
5. If the reporting corporation is a Foreign  corporation and under Section 883 their gross income is tax exempt, but still complies with the reporting requirements of Section 883 and Section 887.
6. If the reporting corporation and the related party are both non-US person.

Foreign Person

As a reference** a foreign or non-US person is:

1. An individual who are not a US resident/citizen.
2. An individual who is a citizen or resident of a U.S. possession who is not otherwise a citizen or resident of the United States;
3. Any partnership or corporation that is not created or incorporated under United States and its laws.
4. Any foreign estate or foreign trust described in section 7701(a)(31).
5. Any foreign government (or agency or instrumentality thereof) to the extent that the foreign government is engaged in the conduct of a commercial activity as defined in section 892.

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*see the Form on https://www.irs.gov/pub/irs-pdf/f5472.pdf

** see https://www.irs.gov/instructions/i5472‍