October 17, 2023

Form 5472 instructions: a guide for foreign founders

Location:
Industry:
With Firstbase since:
Website

The IRS requires foreign-owned corporations to file form 5472 to ensure that these companies don’t avoid paying US taxes on their American operations. But what counts as foreign-owned?

Form 5472 is one of the most confusing IRS forms around, so we wanted to explain how it works and who needs to file. In this article, we’ll go over the content and filing requirements associated with Form 5472 and help you stay compliant with IRS regulations.

What is Form 5472? 

Form 5472 is the standard form for companies located in the US but wholly or partially owned by either a foreign entity or person (more on that below).

This form is used to report various transactions that occurred within the fiscal year. These include share sales, stock purchases, assets sales, leases, and more. Note that Form 5472 is a purely informational filing — it doesn’t include any additional taxes beyond your existing obligations.

How to tell if you need to file Form 5472

In general, you need to file Form 5472 if you completed applicable transactions and your company falls into any of the following categories: 

  • A US corporation (C-Corp, S-Corp, or LLC) with at least 25% of shares owned by a foreign entity or person. 
  • A disregarded US entity owned by a foreign entity or person. 
  • A foreign corporation engaging in trade or business within the US. 

Single-member LLCs are generally considered disregarded entities. If you’re the foreign-owner of a single-member LLC or other reporting entity, you must file Form 5472 unless you fall under one of these three exceptions:

  • You did not complete any transaction such as a stock sale, purchase, lease, or other deal
  • Your company is a foreign sales corporation that files Form 1120-FSC,
  • Your company(s) is exempt as per section 883.

How to file 

You file this form with your annual tax return as an attachment, regardless of whether you file your taxes online or via mail.

If you are operating a foreign-owned disregarded entity and have no annual tax return, you will need to file a pro forma Form 1120 with Form 5472. Again, this applies to most foreign-owned single-member LLCs.

What you’ll need

Regardless of how you choose to file your return, here are some crucial pieces of information to begin the process. 

Basic information 

To begin, you’ll need some basic information about your company. This includes principal business type, address, date of incorporation, the countries where these transactions took place, and your total assets for the year. 

Breaking down Form 5472

This form is quite complex, so we’ll break down each part to make it easier to follow along. 

Part I - Reporting corporation 

In addition to the basic information noted above, you’ll also need to report the total value of the transactions you are reporting (in US dollars). This includes the Fair Market Value (FMV) of any non-monetary transactions reported in Part VI.

If your company completed multiple transactions with different people (foreign or domestic) you will need to fill a form for each person you completed a transaction with. 

As this can be quite confusing. Here are some examples where more than one form is needed:

  1. Your company redeems shares of four shareholders with 25% voting power each. A form is required for each shareholder.
  2. Your company purchases property from an Australian citizen. A form is required for your company (the reporting company) and the foreign person you did business with. 

Part II - 25% foreign shareholder

Part II is only required if your company is a foreign-owned US corporation or disregarded entity. You will need to show the foreign shareholder’s stake in the company. This can be done either by value or by votes or directly/indirectly. You’ll also need their social security number (SSN) and/or Entity Identification Number (EIN). 

Part III - Related party

All parties must complete this section, even if they have previously filled out Part II as a foreign entity. Part III tells the IRS about the other company you did business with. To do this accurately, you will need their SSN, Reference ID, EIN, or other identifying numbers.

Part IV - Monetary transactions 

Before filling out this section, note that you are not required to report any transactions with a domestic (US) related party. Part IV only applies to transactions that involve foreign entities or people. 

You will need to fill in any amounts paid and received from any applicable transaction. These values must be reported in US dollars — attach a schedule to the form to show the exchange rates used. 

If the exact amount is unknown or indeterminate, you can write in reasonable estimates. Note that these estimates need to be within 75% to 125% of the actual value of the transaction. 

Finally, you will need to report any amounts borrowed or lent as well as any interest paid. 

Part V - Reportable transactions (foreign DE)

If your company is a foreign-owned disregarded entity, and has completed transactions not yet reported in Part IV, you will need to fill those out here. 

Part VI - Nonmonetary transactions 

As with Part IV, you are only required to fill out this section if the transaction(s) occurred with a non-domestic party. This section is intended for situations where  the compensation  was non-monetary or less than was agreed upon. For example, if you sold a piece of land in exchange for shares in a company, you would need to report this transaction in Part VI. 

Additionally, if the transaction was completed with a foreign person and not an entity, a schedule  will need to be attached. This schedule will need to contain:

  • Description of the assets transferred
  • Approximate FMV of those assets
  • Any services performed by the reporting corporation or the foreign person 

Part VII - Additional information 

This section pertains to all corporations and involves reporting any additional information, such as deductions, interest payments, and royalties gained. 

Part VIII - Cost sharing arrangement 

If you have a cost sharing arrangement (CSA) with any of the related parties listed, you will need to list details of that arrangement such as the industry you work in, the intangibles involved, and other details. 

Part IX - Base erosion payments etc. 

In part IX, you will need to report on any tax benefits claimed related to the transaction(s) reported on previously. This section is quite complex and will require time or a professional to complete.  To calculate these derivative payments, combine all income, gains, losses, or deductions.

When do I need to file?

This form is due at the same time as your company’s annual tax return. Typically, this due date will fall on the 15th of the fourth month after the business’ fiscal year-end. Note that you are able to request an extension by filing Form 7004

Final thoughts

Form 5472 is frustratingly complex, but the main challenge is determining whether you are required to file. Although it may take quite a bit of time and some extra professional help to complete all the parts, you should be able to fill out most of it on your own.

If you’re still unsure about your filing obligations, don’t hesitate to reach out to a tax professional. You can also click “Contact Us” at the bottom of this page to get in touch with the Firstbase team.

Get started with Firstbase

Start, grow, and manage your business. We're with you each step of the way.