Adnan Islam - International Taxation

Brubeck also manufactures heaters for the Middle Eastern market in the Emirate of Jamul. Local business custom has impelled Brubeck to place its Jamul branch into a legal entity called an enterprise. Under Jamul law, and by the terms of the formation documents, the enterprise creates an entity with separate legal personality, a separate balance sheet, and separate local tax liability. Ownership of the enterprise is evidenced by share certificates. The duration of any enterprise is limited by law to 10 years, the shareholders are fully liable for any debts of the enterprise, and the share certificates are not transferable without permission of the Jamul Foreign Investment Board.

The following discussion reviews the law as applied to the facts presented in example 1.

The 1996 “check-the-box” Treasury regulations permit an unincorporated business organization to elect to be treated as a corporation or as a partnership. Under prior law, the determination of whether the Aukum and Jamal entities constitute branch operations or affiliated corporations is an analysis of whether each entity possesses sufficient corporate characteristics.

The 1996 regulations apply to any “business entity”—defined as an organization that is recognized as an entity for federal tax purposes and is not classified as a trust or other special entity for federal tax purposes. Per se corporations are generally defined and listed in Treasury Regulation 301.7701-2(b); but certain types of recently created foreign corporations inadvertently may not be listed. Several types of business entities are always treated as corporations for federal tax purposes, including the entities listed in the material that follows.

A business entity organized under a federal or state law that describes the entity as “incorporated as a corporation, body corporate, or body politic [or] as a joint-stock company or joint-stock association…”

A business entity organized under any one of several dozen foreign laws specifically identified in the 1996 regulations as analogous to state incorporation laws.

An entity subject to tax as an insurance company.

A business entity wholly owned by a foreign government.

A business entity that is required to be taxed as a corporation, for example, a publicly traded partnership.

Assume that neither Aukum nor Jamal statutes applicable to Brubeck Boilerplate’s plant operations in Aukum and Jamal are foreign statutes specifically identified in the 1996 regulations as analogous to state incorporation laws. Therefore, neither of Brubeck Boilerplate’s plant operations constitutes a per se corporation.

1 Determining whether a foreign business operation constitutes a separate corporation for U.S. tax purposes will not affect theAmount and the timing of available foreign tax credits.Applicability of the pass-through rules of Subpart F.Applicability of other deferral rules of Subchapter C.Deductibility of expenses attributable to domestic or foreign-sourced income.

2 Several types of business entities are “per se corporations” and are always treated as corporations for federal tax purposes. What does not fall into this category?A business entity organized under any foreign laws specifically identified in the 1996 regulations as analogous to state incorporation laws.An entity subject to tax as an insurance company.A business entity wholly owned by a foreign government.A single-member LLC.

A business entity that is an “eligible entity,” and that is not a per se corporation can elect to be taxed as a corporation or as a partnership (if it has two or more owners) or to be disregarded as an entity separate from its owner if it has only one owner. The election is made or changed by filing Form 8832 with the appropriate IRS Center. The election is effective as of the date stated on the Form 8832, provided that date is not more than 75 days before or 12 months after the election is filed. If no effective date is specified on Form 8832, the election is effective when filed. For example, a newly organized entity may make an election effective as of the date of organization if the election is filed within 75 days of the organization date. Note that Revenue Procedure 2009-41 provides that an eligible entity may request [automatic] relief for a late classification election filed with the applicable IRS service center within three years and 75 days of the requested effective date of the eligible entity’s classification election by filing a Form 8832. There is no IRS user fee to file the Form 8832 or the late relief provision within it under Rev. Proc. 2009-41; a reasonable cause statement is required.

If no election is made, an entity organized under the laws of the United States or of any U.S. state or of the District of Columbia after December 31, 1996, is treated as a partnership if the newly organized entity has two or more owners or is disregarded if the newly organized entity has one owner. Any other entity (any entity organized under laws other than those of the United States or any state or the District of Columbia) organized after December 31, 1996, is

treated as a partnership if the entity has two or more owners, at least one of whom has unlimited liability,

disregarded if the entity has one owner and the owner has unlimited liability, or

treated as a corporation if none of its owners has unlimited liability.

Under these rules, if no election is made, Brubeck Boilerplate’s Aukum plant operation will be treated as a corporation because its owner, Brubeck Boilerplate, does not have unlimited liability under Aukum law. Brubeck Boilerplate’s Jamal plant operation will be disregarded because the owner of the Jamal plant operation, Brubeck Boilerplate, has unlimited liability under Jamal law.

Unlimited liability is personal liability for the debts of or for the claims against the entity by reason of being an owner. An owner has personal liability if creditors of the entity may seek satisfaction of all or any portion of the debts or claims against the entity from the owner.

An entity in existence on January 1, 1997, retains the status claimed under prior law until that entity elects a different status under the 1996 regulations.

Although the analysis of whether a corporation has a branch or an affiliated corporation is made under U.S. principles, foreign law must also be considered to determine the legal relationships of the entity, the shareholders and the general public. A U.S. taxpayer generally does not rely on the designation or labeling of the entity by that foreign jurisdiction. However, in the case of the Jamul entity in example 1, it is Jamul law that tells us that there is no free transferability of interests, no continuity of life, and no limitation of liability of the shareholders.

1 Which is not a way that a business entity other than a per se corporation can file Form 8832 to elect to be classified and taxed?A corporation.A partnership (if it has two or more owners).Disregarded as an entity separate from its owner if it has only one owner.A private foundation.

The basis on which a foreign country taxes a branch of a U.S. company is generally a function of the level and quality of business activity carried out by that branch. In the case of most of the U.S. trading partners with which there are income tax treaties, the liability of the branch to local tax depends on whether the branch constitutes a permanent establishment within that country and whether the income in question derives from that permanent establishment.