FORM 5472 Instructions, Tips and Where to File

Guide To Filling Out Form 5472

Form 5472 can be complex for small business owners to navigate and requires filling out all nine parts accurately, so we strongly recommend that you work with an experienced tax preparer.

Here are high-level instructions on how to fill out Form 5472.

Step 1: Reporting Corporation

Part I of Form 5472 focuses on key details about a corporation’s operations, ownership, and transactions with foreign entities.

1. Basic Information: Start by providing the corporation’s tax year dates, name, address, Employer Identification Number (EIN), and total assets. For LLCs, the address can be a foreign one, but it should ensure that IRS notices reach the responsible person.
2. Business Activity: Enter a description of the company’s main business activity along with the appropriate activity code. You can find these codes in the instructions for Form 1120 on the IRS website.
3. Reporting Foreign Transactions: If the corporation had any financial transactions with foreign related parties, report the total amount on line 1f. Related parties include foreign shareholders with at least 25% ownership and anyone related to them or the corporation. Transactions with U.S.-related parties don’t need to be reported on this line. On line 1g, list how many Forms 5472 you’re filing if there are multiple related parties.
4. First-Time Filers and Consolidated Filings: Use lines 1i and 1j to indicate if the form is a consolidated filing or if it’s the corporation or LLC’s first time submitting Form 5472. Foreign-owned LLCs should also check box 3 to confirm their status as disregarded entities.
5. Additional Details: Lines 1k to 1o gather more specifics. These include details about cost-sharing arrangements, the corporation’s country of incorporation, incorporation date, and where it files taxes as a resident. Also, specify the main country or countries where the business operates.
6. LLC Residency and Tax Treatment: The IRS considers single-owner LLCs as disregarded entities, meaning they are not separate from their owners for tax purposes. The LLC itself is not liable for U.S. tax and cannot claim U.S. residency under tax treaties; the income is taxed in the hands of the owner. Be sure to fill out all relevant lines, especially if the LLC has had multiple transactions with related parties.

Step 2: 25% Foreign Shareholder

Part II of Form 5472 focuses on gathering essential information about the LLC’s foreign owner or any 25% foreign shareholder.

1. Foreign Owner’s Information: Provide the name and address of the foreign owner. This could be an individual who is not a U.S. citizen or resident, or a foreign company, partnership, association, estate, or trust.
2. Tax Identification Numbers: If the owner does not have a U.S. Tax Identification Number (TIN), they should use a foreign Tax Identification Number (FTIN). If neither is available, write “none” or “n/a” on the form.
3. Reference Identification Number (RIN): If a foreign TIN or U.S. TIN is not provided, a Reference Identification Number must be created. This is a unique identifier chosen by the filer, which:
   • Must be 50 characters or less and only include letters and numbers (no special characters or spaces).
   • The RIN should be retained and reused consistently each tax year for continuity.
   • Does not require an application to the IRS, as it is self-assigned.
4. Consistent Use of Reference ID: Since the Reference ID is used to track the foreign shareholder each year, it is crucial to record and maintain this number for future filings.

Step 3: Related Party

Part III of Form 5472 is about reporting “Related Parties” that the LLC or corporation had reportable transactions with during the tax year.

1. Provide Related Party Details: Include the name and address of each related party, whether they are based in the U.S. or abroad. This could be the foreign owner or other entities connected to the business, like companies within the same group or family members.
2. Tax ID or Reference ID: If the related party doesn’t have a U.S. Tax Identification Number (TIN), you’ll need to assign a Reference Identification Number (RIN) for tracking. This is especially useful for foreign entities.
3. Business Information (if relevant): For business entities, add the principal business activity and activity code. If the related party is an individual, you can skip this step.
4. Specify Ownership Status: Indicate if the related party is a 25% foreign shareholder, related to the corporation, or connected to a 25% foreign shareholder.
5. Country Information: List the main country where the related party does business and where they file income taxes.
6. Separate Forms for Each Party: A separate Form 5472 must be filed for each related party with reportable transactions, ensuring all financial relationships are properly documented.

Step 4: Monetary Transactions Between Reporting Corporations and Foreign Related Party

Part IV of Form 5472 is used to report all monetary transactions between the corporation and its foreign-related parties. It’s important to note that this section is only for transactions with foreign entities, not domestic ones. Here, businesses will detail primary financial dealings, but many of these may not apply to foreign-owned disregarded entities. If the LLC has had other transactions with its owner or related parties that aren’t covered in Part IV, a box must be checked in Part V to report those separately.

Step 5: Reportable Transactions of a Reporting Corporation That Is a Foreign-Owned U.S. DE

Part V of Form 5472 is for foreign-owned U.S. disregarded entities (DEs) to report transactions that aren’t covered in Part IV. This includes any amounts paid or received in connection with the formation, dissolution, acquisition, or sale of the entity, as well as contributions to and distributions from the LLC. If this section applies, the business must check the box in Part V and provide details of these transactions on a separate attached sheet.

Step 6: Nonmonetary and Less-Than-Full Consideration Transactions Between the Reporting Corporation and the Foreign Related Party

Part VI of Form 5472 is used to report any non-monetary or partial transactions between the LLC and its foreign-related parties. If the LLC had these types of transactions, a detailed statement must be attached. This statement should describe any property, rights, or services exchanged between the LLC and the foreign party, along with a reasonable estimate of their fair market value (FMV). If the FMV isn’t available, another reasonable indicator of value can be used.

Step 7: Additional Information

Part VII of Form 5472 is where the reporting corporation must answer a series of yes-or-no questions. Although most answers will typically be “no,” it’s still crucial to read each question carefully and ensure accurate responses. Businesses should gather complete information from clients to avoid errors, as mistakes or missing documentation can result in significant penalties.

Step 8: Cost Sharing Arrangement (CSA)

Part VIII of Form 5472 is used to report details about any cost-sharing arrangements (CSAs) the reporting corporation had with foreign-related parties during the tax year.

1. Describe the CSA: On line 44, provide a brief description of the CSA to distinguish it from other arrangements.
2. Share of Benefits: On line 47, enter the corporation’s share of reasonably anticipated benefits (RAB) from the CSA for the tax year.
3. Stock-Based Compensation: Lines 48a, 48b, and 48c require details on any stock-based compensation related to the CSA.
4. Intangible Development Costs: Fill in lines 49a and 49b with information about costs associated with intangible development.

Each CSA must be reported separately, so make sure to complete a separate Part VIII for each arrangement and carefully review all information before submission.

Step 9: Base Erosion Payments and Base Erosion Tax Benefits Under Section 59A

Part IX of Form 5472 requires the reporting corporation to disclose any base erosion payments and tax benefits with related foreign parties during the tax year.

1. Base Erosion Payments (Line 50): Enter the total amount of base erosion payments made by the corporation. These include payments to foreign-related parties for which deductions are allowed, such as payments related to depreciable property, reinsurance, or expatriated entities. Refer to specific sections of the tax code for further details on what qualifies as a base erosion payment.
2. Base Erosion Tax Benefits (Line 51): Report the total base erosion tax benefits, which are deductions related to base erosion payments. This can also include certain reductions in premiums or gross receipts connected to reinsurance payments or expatriated entities.
3. Qualified Derivative Payments (Line 52): Provide the amount of qualified derivative payments, which are payments made according to derivatives treated as ordinary income or loss. These are not considered base erosion payments and should be calculated separately.
4. Reserve Payments: If any payments are reserved for future use, make sure to check the appropriate box to indicate this.