Indirect sole ownership definition
Indirect sole ownership means ownership by one person entirely through one or more entities disregarded as separate from their owners or through trusts that are classified as 'grantor trusts' under the US grantor trust rules, regardless of whether any such disregarded entity or grantor trust is domestic or foreign. Thus, the proposed regulations will affect the US-based foreign grantor trust structure often used for succession planning purposes where the matriarch and patriarch are non-US persons but the children or grandchildren are US persons. In that situation, a non-US settlor can establish a trust under the law of a US state (eg, South Dakota or Delaware) that is nevertheless classified as a foreign trust for US tax purposes. That trust can be the single member of an LLC, the director of which can open an investment account and manage the portfolio. Historically, no US income or information return needed to be filed provided that neither the LLC nor the trust received any US source income or engaged in any US trade or business during the taxable year. However, once the proposed regulations become effective the requirement for the LLC to file Form 5472 will provide the IRS with information regarding the non-US trust settlor. The IRS can then exchange information with the tax authorities of the settlor's country of tax residence, although it is not currently obligated to do so.