As explained by the Internal Revenue Service (IRS), form 5472 should be used to provide the information required under Section 6038A and Section 6038C when reportable transactions occur during the relevant tax year of a reporting corporation with a foreign related party or a foreign corporation engaged in a US Trade or Business. Needless to say, the official IRS explanation of this form is not a very clear one. IRS form 5472 is challenging to complete and file and, if it is not done correctly, it could lead to serious problems. In this article, I explain what IRS form 5472 is, why you need to file it, and how it should be completed. What is IRS Form 5472? Foreign taxpayers and those involved in international business or global trade often ask: What is form 5472? The most straightforward answer is that IRS form 5472 is fundamentally designed to prevent tax evasion. The U.S. government is concerned that companies with substantial foreign ownership could potentially evade American taxes through disguising transactions.IRS form 5472 is used by the federal government to ensure that companies with substantial foreign ownership accurately report comprehensive financial information. IRS Form 5472: Understanding the Requirements As a starting point, you need to know whether or not you have a duty to submit form 5472 at all. To do this, you must determine if your company is a ‘reporting corporation’ for the purposes of United States tax law. Reporting corporations are U.S. corporations that are 25% owned by a foreign person or foreign entity or a foreign corporation that is engaged in a trade or business within the United States. For reporting corporations, the form 5472 disclosure requirements are broad. Transactions that may need to be reported include: Sales or purchases of investors; Sales or purchases of real property; Royalty payments and licensing agreements; Commission paid or obtained; Borrowing or lending arrangements; and Any other consideration offered for goods or services. More simply, if a transaction with a related foreign entity affects the U.S. tax obligations of the reporting corporation — meaning it resulted in an increase in revenue or an increase in expenses — it is likely that the transaction should be reported using IRS form 5472. With very limited exceptions, the IRS requires the reporting of all related party transactions with international entities. Penalties There are strict penalties for failure to properly file IRS form 5472. In fact, among many other things, the Tax Cuts and Jobs Act of 2017 enacted increased sanctions for violating this tax law. As of December 31st, 2017, the failure to file form 5472 could result in a $25,000 fine. Do not ignore form 5472. If you do not know what to do, get professional help. Instructions for Completing IRS Form 5472 Given the industry-specific terminology and language the IRS uses in its official documents, completing IRS form 5427 can be a complicated endeavor. You will find that the IRS 5472 instructions contain eight sections. This includes: Part I: Reporting companies must give the IRS sufficient identifying information, including the name, address, and a description of principal business activities. Part II: In addition, 25% or more foreign-owned corporations and LLCs must provide basic information identifying the foreign owner(s). Part III: This section is for identifying the related party with which the reporting corporation had reportable transactions during the relevant tax period. Part IV, Part V, Part VI: These sections are all for the reportable transactions. What specific information should be provided will depend on a number of different factors. Part VII: Part VII asks for additional financial information and offers guidance on certain deductions. Part VIII: Finally, the last section is for matters of base erosion and related tax issues. Once again, the process of completing and submitting IRS form 5472 can be confusing and overwhelming. As there are strict penalties for non-compliance, it is crucial that any and all errors are avoided. If you have any questions or concerns regarding your company’s responsibility to submit this form or about how the form should be completed, an international tax attorney will be able to offer actionable guidance. Get Help from an International Tax Attorney I am an experienced international tax law attorney. With an office in Miami, FL, I represent clients from the United States and from German-speaking regions. To schedule a fully confidential consultation, contact me today.
In the United States, citizens and lawful permanent residents are normally required to file an annual income tax return. This return must include any income earned throughout the world. That is to say, even if an American lives in a foreign country, he or she must still report any income earned there to the United States. This can lead to a double-taxation scenario if the foreign country where the person lives also imposes an income tax. To help minimize double taxation, the United States government has negotiated reciprocal tax treaties with a number of foreign nations, such as Germany. The German-American tax treaty has been in effect since 1990. The treaty has two main goals. First, to avoid double taxation of income earned by a citizen or resident of one country in the other country. And second, the treaty helps to promote residents of either country from avoiding taxes. In fact, under a 2006 amendment to the U.S.-Germany income tax treaty, the governments of both countries are allowed to share tax information with one another. This makes it possible, for instance, for the IRS to see what income taxes a U.S. citizen living in Germany is paying in that country. How the German-American Tax Treaty Works in Practice The treaty itself covers a number of income scenarios (including but not limited to the following): Corporate Profits Profits earned by a U.S. or German business is normally taxable in the country where the business is registered. But if the business in one country creates a “permanent establishment” in the other country, then the profits attributed to that establishment are taxable in the other country. For example, if a German company establishes a branch office in Florida, the profits attributed to that branch are taxable in the United States because the German company has created a “permanent establishment” in the United States. Corporate Dividends The tax treaty provides that corporate dividends are taxable in the country where the shareholder resides. But dividends may also be taxed in the corporation’s country of residence as well. To minimize double taxation, the treaty limits each country’s dividends tax to 5 percent of the gross amount for foreign companies who own at least 10 percent of the corporation’s voting shares; otherwise, the tax is capped at 15 percent. Under certain circumstances each country’s dividends withholding tax can even be reduced to zero. Individual Employees and Personal Services If a resident of Germany temporarily works in the United States, the treaty states that income is not taxable in the U.S., and vice versa. There are several caveats here. The German resident must not remain in the U.S. for more than 183 days during the applicable calendar year, their income must be paid by a German employer, and that income must not come from a permanent establishment of the German employer in the U.S. Special Rules for Educational Professionals A professor, teacher, or other scholar who is a resident of one country may work for, or research in, the other county for up to 2 years without having to pay taxes on their income from such activities to the host country. Note this exception only applies to individuals affiliated with an accredited educational institutional or other organization that conducts “public benefit” research. Need to Know More About the USA-Germany Tax Treaty? This is only a brief overview of some of the subjects covered by the tax treaty between the U.S. and Germany. If you have additional questions or concerns, contact my law office to schedule a consultation.
If you are considering investing in a U.S. business, or if you own a business in the U.S. and plan to have foreign investors, you should learn more about how the taxation of foreign investors in U.S. real estate works. There is tax on foreign property owners and specific laws govern taxation in these circumstances. These laws are very complex, and it is always important to work with an experienced commercial real estate lawyer on your business dealings. Even if you are considering investing in residential real estate as a second home or a vacation home, you should learn more about taxation of foreign investors in U.S. real estate. There are many factors that can impact how a foreign investor will be taxed. These are the key elements involved in determining the taxation of foreign investors in U.S. real estate. Residency Status of the Foreign Investor The foreign investor’s residency status can be extremely important in determining how and whether taxes get paid. If you own real estate or have invested in real estate in the U.S. but you are a non-resident, then the Internal Revenue Service (IRS) likely will only require you to pay taxes (federal taxes, and in some cases state taxes) on any income you earn from real estate within the US. To be clear, both non-resident aliens and non-resident corporations are only required to pay taxes on earnings from property that is situated within the United States. However, if you are a U.S. resident, the IRS will require you to pay taxes on any income, earnings, and other assets both within the U.S. and in other parts of the world. Income and Earnings from Renting Property You Own in the United States If you own property in the U.S. and rent it out, you will be required to pay U.S. taxes on any profits you make from the property. This is true for non-resident aliens, non-resident corporations, and residents of the US. The amount of tax a non-resident alien pays on rental property depends upon a couple of different factors. Generally speaking, non-residents pay a federal tax of 30 percent of the gross received from rental income. However, if the non-resident classifies the rental as a business, then it can be taxed at graduated rates. In the latter situation, the non-resident is also eligible for deductions. The Foreign Investment in Real Property Tax Act In addition, if you sell the property, your residency status will not have any bearing on whether you will be required to pay federal tax on the sale. To be clear, both residents and non-residents must pay federal income tax on earnings generated from the sale of a property in the U.S.. Under the Foreign Investment in Real Property Tax Act (FIRPTA) non-residents are also required to pay a withholding tax, but there are exceptions. Learn More from a Tax Attorney Taxation of real estate for foreign investors can be extremely complicated. Accordingly, you should always discuss your tax situation with an international tax lawyer who has experience assisting clients with issues specific to the taxation of foreign investors. Contact me for more information.