Although it is not an actual tax return per se, Form 5472 is a declaration/an informational form to be submitted to the Internal Revenue Service (“IRS”) annually for U.S. companies with the following conditions.
The “significant” foreign ownership threshold in question for this form is at least twenty-five percent at any time during the tax year. This filing responsibility starts when a U.S. company is 25% foreign- or when a foreign corporation engaged in a trade or business within the United States. A corporation is 25% foreign-owned if it has at least one direct or indirect 25% foreign shareholder at any time during the tax year.
Generally, a foreign person is a 25% foreign shareholder if the person owns, directly or indirectly, at least 25% of either. For instance:
- Reporting Corporation: A 25% foreign-owned U.S. corporation (including a foreign-owned U.S. DE), or A foreign corporation engaged in a trade or business within the United States.
- 25% foreign-owned: A corporation is 25% foreign-owned if it has at least one direct or indirect 25% foreign shareholder at any time during the tax year.
- 25% foreign shareholder: Generally, a foreign person (defined later) is a 25% foreign shareholder if the person owns, directly or indirectly, at least 25% of either:
- Direct 25% foreign shareholder: A foreign person is a direct 25% foreign shareholder if it owns directly at least 25% of the stock of the reporting corporation by vote or value.
- Ultimate indirect 25% foreign shareholder: An ultimate indirect 25% foreign shareholder is a 25% foreign shareholder whose ownership of stock of the reporting corporation is not attributed (under the principles of section 958(a)(1) and (2)) to any other 25% foreign shareholder.
Please note that depending on certain circumstances, this form has to be filed either separately or as part of the actual tax return. For instance, if the company is a U.S. Disregarded Entity and owned by foreigners, the form must be filed separately.
You might be wondering what would happen if you miss/fail to file this form. It is safe to say that the most essential point is the penalties prescribed for the failure to file. It is essential to ensure to have adequate records and information to timely prepare Form 5472 and keep proof of the timely filing of the returns to avoid assessment of the penalty. Otherwise, the company would be at risk to face stiff penalties. The penalty for not filing or failure to file in a timely manner can be from $10,000 to $25,000. This penalty is often automatically assessed by the Internal Revenue Service if a tax return containing Form 5472 is filed late.
In short, if your US company has a foreign owner or foreign shareholders then the company probably has to file form 5472 with the IRS.
If you have any questions on Form 5472 and other tax-related issues, do not hesitate to contact us!