Tax Power U.S. Tax & Business Advisory Services and Solutions

Home / Up / Our Team / Tax Terms / Search Page / Tax History / Why Pay Tax / Tax Problems / Contact Us / Fees & Policies / Fee Payments     

 

Andy Powers-A Professional who cares..About YOU!

Home
Up
Expatriate Tax Questions
U.S. Expatriates
Foreign Nationals
Relocation
Tax News
How The ACA Affects Your Taxes
Why Choose Powers
Standard Approach
Individual Taxes
Business Tax
Employment Issues
Small Business
IFRS
Public Realtions & Marketing
Business Management
U.S. Constitution
Clients
US Economic Survival
Due Diligence
IRS Denying FEIE to U.S. expats
Foreign National US Tax Guide
FATCA
2012 OVDI
Refund Delays
FUI
Tax Court Limits IRA Rolloves
           

 

 

 

 

Many Foreign Corporations Must File Form 5472. Penalty for Non-compliance $10,000

It has come to our attention that, based on advise from their U.S. tax advisors and CPAs, that foreign corporations with income effectively connected with U.S. operations are not required to file Form 5472, Information Return of w 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, pursuant to Internal Revenue Code (“the Code or IRC”) Sections 6038A and 6038C).

Be advised that this is often not true and that pursuant to the Code a “Reporting Corporation” is defined as a foreign corporation doing business in the United States. Further a “Reportable Transaction” is any type of transaction listed in Part IV of Form 5472 for which monetary consideration was the sole consideration paid or received during the reporting corporations tax year. Accordingly, unless one of the exceptions applies (and they are limited) a reporting corporation must file Form 5472 if it had a reportable transaction with a foreign or domestic related party.

One of the exceptions sometimes cited by tax advisors is that if a transaction between a foreign corporation and a foreign owner or related party do not result in the generation of income tax, or if a transaction is exempt pursuant to the provisions of a tax convention (treaty) between the U.S. and the country of residence of the foreign corporation, then there is no requirement to file Form 5472. Although this is true, there are some factors that are often overlooked.

As regards a treaty exemption, the relief from filing Form 5472 only applies if the corporation files Form 8833. Treaty-Based Return Disclosure pursuant to IRC Section 6114 or 7701(b).  

As regards transactions listed as reportable transactions, often the most frequently overlooked line item are the ones showing loans to and loans from foreign shareholders of the corporation. Loans between corporations and foreign shareholders usually have significant tax consequences. For example, if the corporation borrows money from the shareholder the interest paid to the shareholder is tax deductible to the corporation and taxable income to the foreign shareholder. The payment of interest in cash or other property is required to be reported to the IRS as a payment to a foreign person and may also be subject to U.S. withholding tax. If the loan is absent a loan agreement then the taxpayers are required to impute the interest and if they don’t the IRS will do it for them. As regards interest paid to a foreign shareholder and reported as a loan that could have more severe US tax consequences. The loan itself may be a disguised distribution of earning and profits (IE dividends) to the foreign shareholder, which would otherwise possibly be subject to US tax withholding at source (along with other reporting requirements or even potentially more significant, it could be a deemed a distribution of accumulated income that is subject to the punitive U.S. branch profits rules. The message is to examine the rules carefully.

Copyright © 1999-2013 IRS CIRCULAR 230 NOTICE:  To ensure compliance with recently enacted U.S. Treasury Department regulations, we hereby advise you that any and all tax information contained in this website should not be considered as tax advice nor intended for the use of any taxpayer for the purpose of evading or avoiding tax penalties that may be imposed pursuant to U.S. law. Furthermore, the use of any tax information contained in this communication has neither been written nor intended for the purpose of promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any taxpayer, and such taxpayer should seek advice on the taxpayer’s particular circumstances from an independent tax advisor. The information contained throughout this web site is provided without charge, and although all efforts have been made to ensure the reliability of the information contained in this internet web site, the information contained herein should be used for general understanding only and should not be relied upon exclusively as the basis of any tax or financial decisions or for any positions taken on any tax return. Advice should only be obtained directly through the retention of a competent tax advisor. Tax Power is an established trademark of Powers & Company, Inc. and Powers Tax Services since 1999. Unauthorized use of the phrase Tax Power without expressed permission of Powers & Company, Inc. will be prosecuted to the fullest extent of the law. Last modified: January 10, 2014 The articles, guides and published information contained in this website is protected by U.S. copyright laws and cannot be reproduced in any form without the expressed permission.

       Visitors since January 1, 2010   Hit Counter