If you are a nonresident alien who owns a 100% interest in a US Single-Member Limited Liability Company (SMLLC), Treasury Decision 9796 classifies your company as a domestic corporation solely for reporting purposes under IRC § 6038A. You are legally required to file an annual informational return on Form 5472 attached to a pro-forma Form 1120, even if the LLC generated $0 in revenue. Failure to file timely triggers an automatic, mandatory statutory penalty of $25,000 per violation.
1. Statutory Scope of Treasury Decision 9796
For domestic tax classification, a single-member LLC is treated as a "disregarded entity" by default. Historically, foreign-owned single-member LLCs with no US-source income had no requirement to file federal income tax returns.
In 2017, the US Treasury closed this transparency loophole by implementing Treasury Regulation § 301.7701-2(c)(2)(vi). Under these regulations, any domestic entity that is disregarded as an entity separate from its owner is treated as an entity separate from its owner and classified as a domestic corporation for the specific purpose of reporting under IRC § 6038A if it is 25% or more foreign-owned.
2. What is a "Reportable Transaction"?
Under Section 6038A, you must report all transactions between the foreign owner (or related foreign parties) and the US LLC on Form 5472 Part IV and Part VI. Reportable transactions include:
- Capital Contributions: Any money transferred from the foreign owner's personal bank account to open or fund the US company account;
- Capital Distributions / Withdrawals: Any profits or funds transferred from the US LLC account to the foreign founder;
- Owner Loans: Loans given by the founder to the company or borrowed from company reserves;
- Fees for Services: Technical development fees, consulting charges, marketing expenses, or licensing royalties paid across borders.
3. The Exact Filing Assembly Package
A foreign-owned SMLLC does not pay corporate income tax simply by submitting this filing. Instead, you prepare a specialized Pro-Forma Form 1120 that functions purely as an administrative cover sheet:
- Complete the company name, address, EIN, and incorporation date on Form 1120;
- Write in bold across the top: "Foreign-Owned U.S. DE pursuant to Treas. Reg. § 1.6038A-2";
- Check the designated boxes indicating zero taxable corporate income;
- Attach a fully completed Form 5472 identifying the foreign direct 100% owner, their foreign tax identification number (e.g. Indian PAN), and the itemized transaction ledger;
- Submit via specialized IRS Fax Gateway or certified mail by the April 15 deadline (or October 15 with Form 7004 extension).
4. The $25,000 Automated Penalty Defense
The IRS automated campus in Ogden, Utah automatically issues Notice CP215 assessing a flat $25,000 penalty for any Form 5472 submitted past the statutory deadline. An additional $25,000 penalty applies for every 90 days the failure continues after IRS notification.
If you receive an assessment, our CPAs draft formal Reasonable Cause Penalty Abatement Petitions under IRC § 6038A(d)(3), demonstrating reliance on professional tax advice, absence of willful neglect, and clean first-time compliance records to successfully rescind the $25,000 penalty.