Form 5472 and Form 1120-F for Foreign-Owned US Companies

This guide is written for established operating businesses: US companies with foreign owners and US subsidiaries of foreign parents, with real revenue, payroll and intercompany activity. Korven works with companies of that kind, not one-person shell LLCs.

Who must file Form 5472?

The IRS calls the filer a reporting corporation. Under the Instructions for Form 5472, that is one of three kinds of company:

• A 25% foreign-owned US corporation. At any time in the tax year, one foreign person owns, directly or indirectly, at least 25% of the total voting power or the total value of its stock.
• A foreign-owned US disregarded entity. Typically a single-member LLC wholly owned by a foreign person. More on this below.
• A foreign corporation engaged in a US trade or business. It attaches Form 5472 to its Form 1120-F.

Foreign ownership alone does not trigger the form; a reportable transaction with a related party does. You file a separate Form 5472 for each related party you dealt with, so a US subsidiary that trades with its parent and a sister company files two.

What about a foreign-owned single-member LLC?

For tax years beginning on or after January 1, 2017, Treasury regulations treat a US disregarded entity wholly owned by one foreign person as a corporation for Form 5472 purposes only. The LLC still has no income tax return of its own, so it files Form 5472 attached to a pro forma Form 1120, by the due date of that return including extensions.

The pro forma Form 1120 carries only the name, address and items B and E on page 1, with “Foreign-owned U.S. DE” written across the top. It cannot be filed electronically; it goes by fax or mail to the address in the IRS instructions. The small-corporation exception that relieves some corporations does not apply.

For a disregarded entity, reportable transactions include money the owner puts in or takes out: amounts tied to formation, dissolution, acquisition, disposition, contributions and distributions. An LLC its owner funded or drew on during the year has something to report.

Who counts as a related party?

The definition is wider than most owners expect. A related party includes:

• Any direct or indirect 25% foreign shareholder of the reporting corporation.
• Any person related to the reporting corporation, or to a 25% foreign shareholder, under sections 267(b) or 707(b)(1) of the Internal Revenue Code: family members, and companies under common control.
• Any person related under section 482, the transfer-pricing rule, which looks at common control in substance.

The foreign parent, sister companies, the owner personally and companies the owner controls can all qualify. Members of the same consolidated US return do not.

What counts as a reportable transaction?

Almost any money that moves between the company and a related party. Form 5472 asks for amounts received and amounts paid in categories such as:

• Sales and purchases of inventory and other property.
• Rents, royalties and payments for intangible property.
• Fees for services, including management fees charged by a parent, and commissions.
• Amounts borrowed and loaned, reported as beginning and ending balances or as a monthly average, plus interest paid or received.
• Insurance premiums, cost sharing payments and any other amounts.

Non-cash transactions, or those for less than full value, go on a separate schedule with an estimate of their value. Amounts are reported in US dollars, with the exchange rates used.

When is Form 5472 due, and how do you extend it?

Form 5472 has no due date of its own. It is due with the income tax return it is attached to. A corporation filing Form 1120 generally files by the 15th day of the 4th month after its tax year ends: April 15 for a calendar year. The pro forma Form 1120 of a foreign-owned single-member LLC follows the same date.

To extend, file Form 7004 by the original due date. The automatic extension is generally six months, which moves a calendar-year return to October 15. A foreign-owned single-member LLC marks its Form 7004 “Foreign-owned U.S. DE” and sends it to the special fax number or address in the Form 5472 instructions. Form 7004 extends the time to file, not the time to pay any tax due.

What is the penalty for not filing Form 5472?

Under section 6038A(d), the penalty is $25,000 for each tax year in which the company fails to file Form 5472 on time and in the right manner, or fails to keep the required records. The regulations apply it for each related party, so three missing forms can mean three penalties.

• A substantially incomplete Form 5472 counts as a failure to file.
• If the failure continues more than 90 days after the IRS mails a notice, an additional $25,000 applies for each related party for every 30-day period, or part of one, until it is fixed.

What records must you keep?

Treas. Reg. §1.6038A-3 requires records that are permanent, accurate and complete, including the facts behind each related-party transaction:

• Where. Records generally must be kept in the United States. Keeping them outside the United States is allowed under conditions, such as producing them within 60 days of an IRS request.
• Language. Records in another language must be translated into English within 30 days of a request.
• How long. As long as they may be relevant to the tax treatment of a related-party transaction, and at least until the statute of limitations for that year closes.

Weak records can cost more than the penalty: where records are missing, section 6038A(e) lets the IRS set the deduction for related-party payments on the information it has.

When does a foreign corporation file Form 1120-F instead?

A US subsidiary is a US corporation and files Form 1120. A foreign corporation that operates in the US itself, through a branch rather than a US company, files Form 1120-F. Under the IRS instructions, it must file if it was engaged in a US trade or business during the year, whether or not it had US-source income from that business, and also if it had US-source income on which the tax was not fully withheld.

Fiscal-year companies count the same months from their year end, with some exceptions in the IRS instructions. A due date on a weekend or legal holiday moves to the next business day.

How Form 1120-F differs:

• Effectively connected income. The return taxes income effectively connected with the US business, net of deductions, so US and non-US income must be separated and supported.
• Deductions depend on filing on time. Deductions and credits are allowed only on a true and accurate return filed on time, generally within 18 months of the due date. A protective return keeps that right.
• Branch profits tax. Section 884 adds a 30% tax on the branch’s dividend equivalent amount, broadly the US earnings not reinvested in the US business. An income tax treaty may reduce it.
• Treaty positions. A position that relies on a tax treaty to override the Code is generally disclosed on Form 8833.

Whether a group should operate through a branch or a US subsidiary is a structuring question for your tax advisers. Korven works with US-registered companies, including US subsidiaries of foreign parents.

Why do clean monthly books make these forms straightforward?

Form 5472 summarizes a year of intercompany activity. Recorded properly each month, it becomes a matter of reading totals. Otherwise someone rebuilds twelve months of wires and loan balances in March.

• A separate account for each related party, so amounts owed to the parent never mix with amounts owed to a sister company or the owner.
• Intercompany balances reconciled every month, with both sides agreeing, as part of the monthly close.
• Written agreements for intercompany loans, management fees and service charges, with the interest rate and pricing basis on file.
• Capital contributions and distributions recorded as such, never buried in “owner draws” or suspense accounts.
• One exchange-rate method, applied consistently and documented.

The same discipline matters if the foreign parent reports group results, where US numbers flow into consolidated financial statements and intercompany balances have to eliminate cleanly.

What are the most common Form 5472 mistakes?

• Assuming a single-member LLC files nothing. A foreign-owned disregarded entity with reportable transactions files a pro forma Form 1120 with Form 5472 every year.
• Missing a related party. The owner personally, a sister company or a company the owner controls each need their own form.
• Leaving out owner funding. For a disregarded entity, contributions and distributions are reportable even though no service or sale took place.
• Loan balances that do not tie. Loan balances on the form should agree with the balance sheet.

This guide is general information, not tax advice. Confirm your own filing requirements with a tax professional.

How does Korven handle Form 5472 for foreign-owned companies?

Korven runs the finance function for established US-registered companies with $2 million to $50 million in revenue, including US subsidiaries of foreign parents. Owners can be anywhere; the work is remote. Inside the Korven Finance Office, a senior specialist closes the books each month and tracks every related-party balance with its support.

At year end, the related-party totals come straight from closed books. Korven prepares your books and tax file; our licensed CPA partner prepares, signs and files your return. Form 5472 goes with that return. Where a group needs cash planning or reporting to a foreign parent, a fractional CFO works alongside. See also how business tax preparation works at Korven.

What else do people ask about Form 5472?