Form 5472 Filing Requirements: A Guide for US Corporations

The IRS loves collecting information, and they have a form for almost everything. One form you may need to familiarize yourself with is Form 5472. It may sound obscure but this form is pretty straightforward and is mostly an information return for certain corporations. However, failure to comply with Form 5472 filing requirements can result in steep penalties, making getting it right the first time essential.

You’ll learn all about Form 5472 filing requirements and common issues businesses encounter. The penalties for not filing form 5472 can reach $25,000. This is why it is important to understand the basics of this form.

Key Takeaways:

• Form 5472: Required for 25% foreign-owned U.S. corporations and foreign corporations doing business in the U.S.
• Penalties: $25,000 initial fine for late filing, with additional fines every 30 days past the 90-day correction period.
• Who Must File: 25% foreign-owned U.S. corporations and foreign corporations, including single-member LLCs owned by foreign persons.
• Reportable Transactions: Includes all exchanges with foreign-related parties. Transparency is crucial.
• Deadlines: File with Form 1120 by March 15 or April 15, depending on the fiscal year. Extensions are available but don’t remove the filing requirement.

What Is Form 5472?

IRS Form 5472 is officially called “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.” Although it sounds long and confusing, I’ll explain.

Form 5472 is mostly used to provide information to the IRS about certain transactions that happen between a US corporation and a foreign-related party. In essence, it is all about transparency for the IRS to be aware of how corporations in the United States are conducting business with foreign parties, regardless if the party is domestic or foreign.

What Triggers Form 5472 Reporting Requirements?

For you to need to file Form 5472, you need to be a “reporting corporation” engaged in a “reportable transaction.” Don’t worry, I’ll go into those definitions next. However, these two components are essential to figuring out whether or not you have to file this form. What it comes down to is if a foreign entity has substantial control over a US corporation.

Who Is a “Reporting Corporation”?

I understand tax regulations can be a little dull, but stick with me here because this is important. According to the IRS, there are two situations where you’ll need to file Form 5472 as a reporting corporation: if a corporation is 25% foreign-owned, including foreign-owned disregarded entities, or if the corporation is foreign and conducts business in the United States.

25% Foreign Ownership

Let’s break this down. A U.S. corporation is considered 25% foreign-owned if a foreign person directly or indirectly holds at least 25% of either the total voting power of all classes of stock entitled to vote or the total value of all classes of stock. Let’s consider an example.

Imagine a US company called “Tech Solutions Inc.” Now, imagine that a German company, “Global Innovations GMBH”, acquires a 30% stake in Tech Solutions Inc. This would make Tech Solutions Inc. a 25% foreign-owned corporation because a foreign company (Global Innovations GMBH) now owns more than 25% of their stock. Consequently, Tech Solutions Inc. would become a reporting corporation and likely would have to comply with Form 5472 instructions.

Foreign Corporations Conducting Business in the United States

This scenario is pretty easy to understand. If you’re a foreign corporation that does any amount of business in the United States, you will have to file a Form 5472. I’ll dive a little more into what constitutes “doing business” later in the post. However, this is essentially how the IRS keeps track of business operations in the U.S., regardless if the business is incorporated overseas or not.

It applies to all corporations as detailed in the Internal Revenue Manual 20.1.9.9. I always say it is much easier to comply than pay a large penalty later on. This also allows you to get a US taxpayer identifying number, like an EIN.

Reportable Transactions on Form 5472

Now we know what a reporting corporation is, but how do we determine which transactions are “reportable transactions”? Thankfully, the Form 5472 filing instructions lay out exactly which types of transactions must be reported on the form.

As mentioned, any foreign-related party transaction that involves solely monetary consideration, whether paid or received by the reporting corporation, is considered reportable. This same rule applies to transactions where consideration is either nonmonetary or is considered less than full consideration.

Though the IRS loves to interpret these regulations as broadly as possible, the safe bet is to be completely transparent and overreport when possible. I tell my clients all the time that being truthful and fully compliant with filing regulations can prevent headaches in the future, and they appreciate the guidance.

Reportable transactions may include but are not limited to:

• An exchange of money, including rents, payments, sales, remuneration, premiums, commissions, royalties, and capital contributions. If money is going in or coming out of a US corporation and the money comes from or is given to a foreign party with a 25% or more ownership stake, it needs to be reported on Form 5472.
• The use of U.S. corporate property by a foreign-related party, regardless of payment arrangements.
• Loans and interest payments to and from foreign-related parties and U.S. corporations. Remember this can go both ways – so a U.S. corporation can loan money to a foreign party, or a foreign party can loan money to a US corporation.
• Acquisition, formation, disposition, or dissolution transactions involving a U.S. corporation with at least 25% foreign ownership, whether a disregarded entity or not. A disregarded entity refers to single-member LLCs that are “disregarded” by the IRS when they are solely owned by one party. This essentially means a Single-member LLC does not need to file corporate taxes – just the income is passed on to the owner. But even single-member LLCs are still required to file form 5472.

Defining “Related Party” for Reporting

To correctly file Form 5472, it’s also necessary to know which individuals and businesses constitute a “related party” when conducting transactions with reporting corporations.  Any person or entity directly tied to the ownership, control, or operations of the reporting corporation, whether a foreign person or a person with a business interest in the company that influences decisions about income or deductible expenses for taxes.

Here are some common relationships that classify someone as a “related party”:

• Any person who has at least a 25% foreign shareholder interest in the reporting corporation
• Family members of corporate officers
• Two corporations with at least 50% common ownership by the same person

When Do Reportable Transactions Occur?

For most transactions, Form 5472 looks at accrual accounting methods. Although the rules for figuring out the accrual date are similar to normal accrual accounting rules there are certain special situations in the form instructions to look out for.

If you are a small business you likely already are using the cash basis accounting method which makes this easier. The rule of thumb though is: if a payment affects the reporting corporation’s taxable income in any way it will most likely trigger the need for a Form 5472.

What Information Do You Need to File Form 5472?

When completing your Form 5472 filing, here are the key pieces of information you’ll need to know to fully and correctly report to the IRS.

Part 1

Part 1 covers basic identifying information about the reporting corporation such as name, address, and employer identification number (EIN). You must disclose the total assets at the end of your tax year for the reporting corporation and answer some basic identifying information like your primary business and the four-digit North American Industry Classification System (NAICS) code that corresponds with your industry.

Finally, you will disclose your tax year and whether the reporting corporation is either a 25% foreign-owned domestic corporation or if a foreign person directly or indirectly owns 50% or more of the reporting corporation’s stock at any time during the tax year.

Part 2

Part 2 gathers details on 25% Foreign Shareholders, providing their identifying information and their relationship to the corporation such as ownership percentage, type of stock owned, country where the shareholder is located or resides, and a description of their principal business activity. 

Again, if your reporting corporation has two or more foreign shareholders that qualify as a 25% shareholder, a separate Form 5472 must be submitted for each shareholder.

Part 3

In Part 3 you’ll list all related parties, including:

1. Name
2. U.S. address
3. Relationship to the reporting corporation
4. Country where the related party was organized (if a business) or resided (if an individual) during the tax year
5. Principal country or countries of the related party’s business (similar to Part 1)
6. And a four-digit NAICS code for the party’s principal business. 

As a rule, be sure to provide as much information as possible to prevent the need for revisions later.

Part 4

Here’s where most filers hit a snag. In Part 4 you will itemize all Monetary Transactions between your reporting corporation and the foreign-related party. The amount must be specified in U.S. dollars with a separate attachment outlining the applicable exchange rates you used to convert foreign currency into US dollars.

Amounts for these exchanges, receipts, and payments may also be estimated as long as they fall within a range of 75% to 125% of the actual value. Otherwise, amounts should be documented in total if they’re below $50,000.

Part 5

If your reporting corporation is a disregarded entity that is solely owned by a foreign entity and you have completed part 4, then you will also have to complete part 5. Part 5 focuses on other types of reportable transactions and you’ll provide descriptions for them on a separate attached statement.

For example, imagine a Delaware disregarded entity called “US Holdings LLC,” which is 100% owned by a British firm. “UK Investments LTD”, US Holdings LLC acquires a property in Miami during the tax year. According to IRS Section 1.6038A-1, this is classified as a reportable transaction that must be explained in Part 5.

Part 6

Similar to Part 4, you will avoid completing Part 6 if all transactions are between a domestic entity and a reporting corporation. However, if the reporting corporation conducts any transactions with a foreign related party, any transactions involving a nonmonetary transaction, a non-full consideration transaction, or both, must be listed here and further described in an attached schedule.

For example, let’s consider a situation where our “Tech Solutions Inc.” transfers software rights to their foreign shareholder, “Global Innovations GMBH.” They reach an agreement for an amount that’s slightly below fair market value in exchange for favorable distribution terms within the German market. These software rights don’t include the source code but only the ability for a 3rd party to commercially use and sell the finished program.

Because this is considered a less than full consideration exchange with a foreign party it would need to be fully detailed in an attached statement. Be sure to avoid disclosing any information about parties, payments or amounts in an attached statement that violates your company’s NDAs. Simply include relevant details that adhere to your agreements.

Part 7

Part 7 is probably the most confusing part of Form 5472 and you should seek legal advice to help figure out whether any items apply to you, especially if you conducted a tax treaty for your business activities in the tax year. Although you’ll probably not be able to avoid filing Form 5472 in most situations a tax treaty may potentially grant your company exempt status as outlined in Internal Revenue Code 883. 

Here though is a basic summary of what information Part 7 wants you to disclose.

**Lines 40a and 40b** deal with a specific IRS code about disallowing certain deductions on interest and royalty payments made to a foreign-related party if these payments were made using an accounting method or tax benefit not recognized under Internal Revenue Codes 267 and 707.

**Lines 41a-41d** concern foreign-derived intangible income (FDII). In simple terms, it applies if a corporation claims a deduction for this FDII when making transactions with a related foreign party.

**Lines 42a and 42b** involve loans. In short, if your reporting corporation lends to or borrows from a related foreign party and either charges or is charged an interest rate that’s not recognized under IRS codes for business lending, then you need to include details about these loans in this section.

**Lines 43a and 43b** address instances where a corporation issues debt that qualifies under Internal Revenue Code 385, along with the date it was issued. You only need to include debt that falls within certain transactions spelled out in Internal Revenue Code 1.385-3.

Part 8

A separate Part 8 will have to be included in your Form 5472 filing for each Cost Sharing Agreement you are currently in with foreign-related parties. Cost-sharing agreements happen when two businesses, often in similar or overlapping industries agree to share expenses, investments, or resources in ways that allow them to access new markets or reduce expenses.

An example could be “Tech Solutions Inc.,” which is 30% owned by “Global Innovations GMBH.” If both of these companies are engaging in the joint development of software, they might decide to split the costs.

So let’s imagine they enter into an agreement where Tech Solutions pays 60% of all R&D Costs, while Global Innovation GMBH pays 40%.  Because this cost-sharing agreement involves a related foreign party a Part 8 would have to be added. If they have three different cost-sharing agreements with different related parties for each product in development, then three Part 8s must be attached.

Part 9

Part 9 was added following updates to the IRS tax code following the passage of the 2017 Tax Cuts and Jobs Act. It relates to base erosion payments and any potential benefits related to tax erosion under IRC 59A, often tied to transactions involving controlled foreign corporations.

The IRS defines a base erosion tax benefit as “any deduction allowed in computing taxable income…”. Base Erosion simply describes how corporations may reduce their taxable income in one jurisdiction by shifting it to a different country or tax haven, even if they only “appear” to operate in a separate tax jurisdiction when the actual control of business activities, revenue, or resources still originates domestically.

This applies to reporting corporations making base erosion payments, claiming base erosion tax benefits, or both when interacting with related parties that are foreign persons. A reporting corporation that has taken into account items described under IRC 482 to figure taxable income may also be required to report these items in Part IX.

Important Deadlines and Filing Considerations

When you’ve figured out what forms you need to file and you’ve compiled the correct documents and records the next step is to file your forms by the appropriate deadlines. Failing to comply can subject your company to stiff penalties and increase your company’s chance of audits.

You must attach Form 5472 to Form 1120 and file everything by the annual income tax deadline on March 15 if your LLC uses a fiscal tax year, or April 15 for those using the traditional calendar year. Thankfully, you can get a six-month extension by filing Form 7004. It’ll shift your filing date to either September 15 or October 15, respectively, although an extension doesn’t relieve your company of tax liabilities if they are owed.

Be sure to check out Form 5472 itself and familiarize yourself with the most recent filing requirements for your specific corporation. Although IRS regulations often remain unchanged for years be sure to get updated forms.

You can also reach out to an experienced tax professional at Dimov Tax for more information on this process, but understanding what this form asks for is helpful to you in the long run.  

Penalties

Failing to submit Form 5472 on time will result in steep penalties. They start with an initial fine of $25,000.  Although it’s often possible to fix these errors within 90 days and avoid this penalty by submitting revisions that clear up discrepancies, for every 30 days after the 90 days the fine increases by another $25,000.

These penalties can quickly balloon. And to make things worse they can stack. Not only that but a member of a group of corporations who filed a consolidated return is a reporting corporation and also subject to the $25,000 penalty for failure to file.

In addition to penalties associated with fines for failing to submit this form correctly, there may also be criminal charges. They are brought forward by the IRS Criminal Investigation Division. I’m sure you’d want to avoid all this if possible, right?

Although the IRS may only request that certain international tax compliance and informational return delinquencies be brought before civil courts in instances like with tax years 2019 and 2020, Form 5472 noncompliance is usually taken quite seriously.

Even if Form 5472 filing penalties seem high, it is always a good idea to be transparent in any tax dealings and to overreport when you feel uncertain if something may qualify as a reportable transaction. If the tax situation is extremely complex, don’t hesitate to contact a tax lawyer, especially in regard to base erosion.

When working with more complex situations such as high net-worth clients or international corporations it’s easy for misunderstandings to happen between a filer and the IRS.

Record-keeping

In addition to form 5472 filing requirements, there’s the record-keeping. It needs to happen every year with this form, which will affect how your business interacts with foreign shareholders or other related foreign parties, regardless if they reside domestically. 

These reporting corporations should maintain the Form SS-4, Articles of Incorporation, tax records, transaction ledgers, meeting minutes, agreements, invoices, receipts, and contracts and they should all be verifiable by the IRS if needed. It is especially important to keep in mind the current penalties.

FAQs about Form 5472 Filing Requirements

Who needs to file a Form 5472?

If your U.S. corporation has 25% foreign ownership or more, or you’re a foreign company and you do business in the U.S. you have to file a Form 5472. Although the IRS recently has granted penalty relief on other reporting delinquencies it’s best to err on the side of caution with Form 5472 and report when necessary.

What triggers Form 5472?

Anytime you do business, make transactions, or engage in exchanges of money, goods, or services, if it’s with a foreign party with substantial control (25% ownership or more), those are likely reportable transactions.

What is the filing requirement for foreign-owned US-disregarded entities?

For disregarded entities such as a single-member LLC that are 100% owned by a foreign person, the Form 5472 filing requirement is essentially the same. But you’ll also have to attach it to a “pro-forma” Form 1120 because single-member LLCs traditionally have not filed annual tax returns since they simply pass profits or losses on to the owner.

What is the penalty for not filing Form 5472?

If you do not file on time, the penalty is $25,000. Failure to remedy any errors for each additional 30 days beyond the initial grace period of 90 days results in additional fines of $25,000 per period. These penalties can get steep quickly so it’s much easier to get it right in the first place.

Let The Professionals At Dimov Tax Help Your Business

Form 5472 is important for both the IRS and international businesses conducting business activities inside the United States. Although many find navigating tax codes a real pain in the neck, Form 5472 is a necessary and practical step to ensuring everyone complies. Thankfully the process is not particularly complex once you’ve figured out all the terminology used.

By understanding who must file and when and what is considered a “related party” and “reportable transaction” the Form 5472 filing requirements can be demystified. And even better, it allows corporations with substantial foreign control to work cooperatively with the IRS to minimize the risk of steep fines.

It is really about being mindful of the potential for penalties, knowing deadlines, and keeping verifiable records. Although you might get away with not filing it is best to file the form so you don’t risk hefty fines down the road. For more information or to speak with someone about these issues, contact Dimov Tax today.