Prior to 2017, ownership of a Limited Liability Company (LLC) by a non-American generally did not require the filing of a U.S. tax return with the IRS. Consequently, non-American programmers and other digital nomads that lived and worked outside the U.S. but created an LLC (that was disregarded for tax purposes) to help their operations rarely had any U.S. tax filing obligation. This was due to the fact that the IRS generally only imposed taxes and reporting requirements on “U.S. persons” (i.e. U.S. citizens, residents, corporations, trusts, etc…) and “foreign persons” (i.e. any person or legal entity that is not a “U.S. person”) that had income related to a physical activity or presence in the U.S. In contrast, the aforementioned digital nomads would generally choose to treat their LLC as a “disregarded entity” for tax purposes (i.e. it would not exist for tax purposes) and, since they had no other physical connection to the U.S., they would not be subject to any U.S. tax reporting. However, in an effort to “enhance the United States’ compliance with international standards of transparency and exchange of information for tax purposes” and to “strengthen the enforcement of U.S. tax laws”, the IRS issued final regulations (TD 9796) which, among other things, effectively created a new U.S. tax filing requirement for disregarded foreign-owned LLC’s. As of January 1, 2018, every foreign owned LLC that had a reportable transaction needs to annually file Form 5472 (which reports certain ownership and accounting details of the LLC) and comply with the associated record-maintenance requirements.
- Taxpayer ID number- Each foreign-owned LLC will need to be reported and will need its own Employer Identification Number (EIN). Also, the owner of each LLC will need to report a foreign taxpayer identification number (FTIN) but will not be required to have an EIN or ITIN.
- The filing deadline for Form 5472 is April 15 for most non-American owners of a disregarded LLC (unless the owner already has a different IRS filing deadline) .
- Penalty warning- It must be noted that the tax filing must be submitted prior to the deadline and that a late filing of Form 5472 exposes the LLC (and the foreign owner) to a $10,000 penalty.
As always, you should not rely on the above as legal advice and, if you need assistance with the U.S. tax matters, please feel free to contact us.