Who Must File Form 5472? Filing Requirements

The Internal Revenue Service (IRS) uses Form 5472, “Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business,” to gather information on financial interactions between certain corporations and their foreign affiliates. The form does not calculate tax liability but serves as a disclosure document for the government to review transactions between related entities across international borders.

Defining a Reporting Corporation

A “reporting corporation” is the entity responsible for filing Form 5472. This definition covers two main categories: a U.S. corporation with at least one foreign shareholder owning 25% or more of its stock, and a foreign corporation engaged in a U.S. trade or business that has reportable transactions.

A specific rule applies to U.S. disregarded entities (DREs), such as single-member LLCs, owned by a foreign person. The IRS treats a foreign-owned U.S. DRE as a domestic corporation for this purpose. This makes the DRE a reporting corporation if it has reportable transactions with its foreign owner or related parties.

Even if a DRE has no income tax liability, it must file a pro forma Form 1120, “U.S. Corporation Income Tax Return,” with Form 5472 attached. The pro forma return serves as a cover sheet for the transactional data required by the IRS.

Identifying a 25% Foreign Shareholder

A “25% foreign shareholder” is a foreign person who, at any point during the tax year, directly or indirectly owns at least 25% of the reporting corporation’s stock. The ownership test is met if the foreign person holds 25% of the total voting power of all classes of stock entitled to vote or 25% of the total value of all classes of stock. A “foreign person” can be a nonresident alien individual, a foreign corporation, a foreign partnership, or a foreign trust or estate.

Determining ownership requires applying the constructive ownership rules under Internal Revenue Code Section 318. These attribution rules treat an individual or entity as owning stock that is actually owned by certain related parties. This prevents circumventing the 25% threshold through complex ownership structures.

For example, stock owned by a spouse, child, grandchild, or parent of a foreign individual can be attributed to that individual. Stock owned by a partnership, estate, or trust is treated as being owned proportionately by its partners or beneficiaries, which can also contribute to meeting the 25% ownership requirement.

Determining Reportable Transactions

A reporting corporation must file Form 5472 if it has engaged in any “reportable transactions” with a foreign related party. The definition of a “related party” is broad and includes the 25% foreign shareholder, any entity related to the corporation under tax code sections like Section 267 or 707, and any other entity that is part of the same controlled group.

The scope of reportable transactions is extensive and covers nearly any type of interaction between the reporting corporation and its foreign related party. This includes:

• Sales of inventory or property rights, like patents and trademarks
• Payments for services, rents, royalties, and commissions
• Loans and interest payments
• Capital contributions or distributions

Transactions are reportable even if no actual money changes hands. The requirement to report applies to any exchange of money or property, regardless of whether consideration was paid, ensuring that non-monetary and in-kind transactions are disclosed.

Penalties for Non-Compliance

The IRS imposes an initial penalty for not filing a complete and accurate Form 5472 by the deadline, including any extensions. This penalty is set at $25,000 for each required Form 5472 that is not filed or is filed incompletely.

If the non-compliance continues after the IRS has notified the corporation of its failure to file, penalties can escalate. If the failure persists for more than 90 days after the date of the IRS notice, an additional continuation penalty of $25,000 is assessed. This penalty applies for each 30-day period, or fraction thereof, that the failure continues.

A separate Form 5472 must be filed for each related party with which the corporation had reportable transactions, so a corporation could face separate penalties for each failure to file. While the IRS may waive these penalties if the taxpayer can demonstrate reasonable cause, criminal penalties may also apply for failure to submit information or for filing false or fraudulent information.