International Tax Blog

International PLRs of the 19th week of 2012

Last week the IRS published the following Private Letter Rulings relating to international taxation. 

PLR 201219002: Late Canadian registered retirement savings plan ("RRSP") deferral election.  Form 8891.  Rev. Proc. 2002-23. 

PLR 201219004: Late Canadian registered retirement savings plan ("RRSP") deferral election.  Form 8891.  Rev. Proc. 2002-23. 

PLR 201219007: Late entity classification election for foreign entity to be treated as disregarded entity.  Form 8832.  Treas. Reg. §301.7701-3(c). 

PLR 201219009, PLR 201219010, and PLR 201219011: Foreign companies that made elections under Code §953(d) to be taxed as domestic corporations would qualify under as insurance companies under Code §831 if they were domestic corporations.

 

 

International PLRs of the 15th and 16th Weeks of 2012

Last week and the week before, the IRS published the following written determinations relating to international taxation. 

PLR 201215005: Spin-off of domestic corporation to a foreign parent

[PLR?] 201215011: An organization with charitable activities outside U.S. did not meet the operational test of Code §501(c)(3) because it could not substantiate that its assets were used exclusively for exempt purposes.

Late entity classification elections for foreign entities to be treated as disregarded entities.  Form 8832.  Treas. Reg. §301.7701-3(c):

• PLR 201216001
• PLR 201216003
• PLR 201216004

Late entity classification elections for foreign entities to be treated as associations taxable as corporations.  Form 8832.  Treas. Reg. §301.7701-3(c). 

• PLR 201216012
• PLR 201216014
• PLR 201216021
• PLR 201216024

PLR 201216026: Acquisition of foreign target treated as qualified stock purchase under Code §338(d)(3), even though a portion of the shares were sold, causing the percentage owned after the sale to be below 80%.

International PLRs of the 13th week of 2012

Last week the IRS published the following Private Letter Rulings relating to international taxation.

PLR 201213007: Late entity classification election for foreign entity to be treated as disregarded entity.  Form 8832.  Treas. Reg. §301.7701-3(c).

PLR 201213014: Late Canadian registered retirement savings plan ("RRSP") deferral election.  Form 8891.  Rev. Proc. 2002-23.

PLR 201213015: Taxpayer intended to change its classification of a foreign entity to partnership for federal tax purposes but mistakenly filed a Form 8832 to be treated as a disregarded entity, a status for which it was not eligible.

PLR 201213017: Late entity classification election for foreign entity to be treated as disregarded entity.  Form 8832.  Treas. Reg. §301.7701-3(c).

 

International PLRs / CCAs of the 6th week of 2012

This past week the IRS published the following Private Letter Rulings and Chief Counsel Advice relating to international taxation:

PLR 201206003: A CFC’s income from sales to related parties was not foreign base company sales income (“FBCSI”) under the same country manufacturing exception of Code §954(d)(1)(A).  The CFC was incorporated in Country 1 and the products were partly manufactured in Country 1 by an unrelated party.

PLR 201206010: Extension of time granted to file a Code §338(g) election for the qualified stock purchase of a foreign corporation by a foreign corporation.

PLR 201206012: Late entity classification election for foreign entity to be treated as an association taxable as a corporation.  “Form 8832 * * * was inadvertently not timely filed.”  Treas. Reg. §301.7701-3(c) and Treas. Reg. §301.9100-1, -2, and -3.

PLR 201206013: Late entity classification election for foreign entity to be treated as disregarded entity.  “may have inadvertently failed to timely file Form 8832.”  Treas. Reg. §301.7701-3(c) and Treas. Reg. §301.9100-1, -2, and -3.

CCA 201206014: Application of the statute of limitations (Code §6501(c)(8)) to an S corporation and certain of its shareholders.  After the HIRE Act, the entire tax return stays open and not just items related to the 5471.  Both the S corporation and 2 of its shareholders were required to file 5471s.

PLR 201206015: Income earned by a regulated investment company (RIC) from the ownership of a wholly owned subsidiary that is a controlled foreign corporation constitutes qualifying income, whether or not attributable to subpart F income, for purposes of Code §851(b)(2).

What is a “check-the-box” election?

In short, a “check-the-box” election is an entity classification election that is made on I.R.S. Form 8832, Entity Classification Election.  The procedure to make a check-the-box election is quite easy.  You simply check the appropriate box, specify the date that the election is to be effective, sign and file the form.

Be aware, however, that the tax implications of making such an election can be extremely significant.  It is therefore very important that taxpayers speak with a tax adviser to discuss the implications of making such an election before the election is made.

Per Se Corporations

Only “eligible entities” can make check-the-box elections.  The regulations contain a list of the types of entities that are not eligible entities.  Treas. Reg. § 301.7701-2(b).  These non-eligible entities must be treated as corporations and are often referred to as “per se” corporations.

In the domestic context, an entity organized as a “corporation” or as “incorporated” under a federal or state statute would be a per se corporation.  For foreign entities, a country-by-country list is provided in the regulations that specifies the per se corporations for each country.  Typically, S.A.s, N.V.s, P.L.C.s, and A.G.s are per se corporations.

Default Entity Classifications

There are three possible U.S. tax classifications for “business entities” --- corporation, partnership, or disregarded entity.  The regulations provide default classification rules for eligible entities (i.e., non-per se corporations) that do not make check-the-box elections.  Treas. Reg. § 301.7701-3(b).

A U.S. domestic “eligible entity” defaults to be treated as a partnership if the entity has more than one owner and as a disregarded entity (similar to a sole proprietorship for individuals or to a branch or a division for corporations) if the entity has only one owner.

For instance, if a U.S. L.L.C. is created with two owners and no check-the-box election is filed, the entity will default to be treated as a partnership.  If the U.S. L.L.C. only has one owner and no check-the-box election is filed, it will default to be treated as a disregarded entity.

The default classification rule for non-U.S. entities is different.  It is often assumed by taxpayers and their domestic tax advisers that a foreign entity that is similar to a U.S. L.L.C. will default to be treated as a partnership or disregarded entity (as would be the case for a U.S. L.L.C.).  However, foreign L.L.C.s almost always default to be treated as corporations.

The rule for a foreign eligible entity is that it will default to be treated as:

1. a corporation if all of its owners have limited liability,
2. a partnership if it has two or more owners and at least one owner does not have limited liability, and
3. a disregarded entity if it has a single owner that does not have limited liability.

Initial Classification

When an entity is initially formed, it will obtain an “initial classification.”  This initial classification can be determined under the default rules or it can be determined as a result of a check-the-box election.  Check-the-box elections can generally only be retroactive 75 days from the date of filing (certain late elections may also be allowed).  Thus, if no election is made within 75 days of establishing an entity, the default classification will apply.

In the foreign context, this can be problematic where the entity defaults to be treated as a corporation (the typical situation) and the owners would prefer that the entity be treated as a partnership or a disregarded entity, but the owners did not in advance seek the advice of a tax advisor knowledgeable in this area.

Change in Classification

It is important for the taxpayer to understand the tax implications of changes in an entity’s classification.  If an entity changes its classification from a corporation to either a partnership or a disregarded entity, the transaction will often be a taxable liquidation.  A taxable liquidation triggers gain or loss to both the corporation and to the shareholder(s).  For a foreign entity, gain at the corporate level can trigger Subpart F Income and gain at the shareholder level is often taxed as ordinary income.

Although it may be very simple to file Form 8832 and change the classification of an entity, the tax costs can be immense.  Taxpayers are well advised to speak with a knowledgeable tax advisor prior to the filing of any check-the-box election.

I.R.S. Extends Due Date for Late Check-the-Box Elections

Today the I.R.S. issued Revenue Procedure 2009-41 which allows certain late entity classification (“check-the-box”) elections to be filed retroactively for a period of 3 years and 75 days.

Entity Classification Elections Generally

Treas. Reg. § 301.7701-3(a) provides in part that a business entity that is not a per se corporation under Treas. Reg. § 301.7701-2(b)(1), (3), (4), (5), (6), (7), or (8) (i.e., an eligible entity) can elect its classification for federal tax purposes as provided in Treas. Reg. § 301.7701-3.  An eligible entity with at least two members can elect to be classified as either a corporation or a partnership, and an eligible entity with a single owner can elect to be classified as a corporation or as a disregarded entity.

Treas. Reg. § 301.7701-3(b) provides a default classification for an eligible entity that does not file an entity classification election.  Thus, an entity classification election is necessary only when an eligible entity chooses to be classified initially as other than its default classification or when an eligible entity chooses to change its classification.

Form 8832

Entity classification elections are made by filing Form 8832, Entity Classification Election.  Treas. Reg. § 301.7701-3(c)(1)(iii) provides that an entity classification election will be effective on the date specified by the entity on Form 8832 or on the date filed if no such date is specified on the election form.  The effective date specified on Form 8832 cannot be more than 75 days prior to the date on which the election is filed and cannot be more than 12 months after the date on which the election is filed. 

9100 Relief

Under Treas. Reg. § 301.9100-1(c) the I.R.S. may grant a reasonable extension of time to make certain elections.  Treas. Reg. § 301.9100-3 provides that the I.R.S. will grant an extension of time when the taxpayer provides the evidence to establish to the satisfaction of the I.R.S. that the taxpayer has acted reasonably and in good faith and the grant of relief will not prejudice the interests of the government.

Revenue Procedure 2002-59

Revenue Procedure 2002-59 provides guidance for entities newly formed under local law to request relief for a late initial classification election filed by the due date for the first federal tax return (excluding extensions) of the entity’s desired classification for the year of the entity’s formation.

Extended to CHANGES in Classification

Revenue Procedure 2009-41 supersedes Revenue Procedure 2002-59.  Significantly, Revenue Procedure 2009-41 extends late entity classification relief to changes in classification elections.  Under Revenue Procedure 2002-59 relief was only available for initial classification elections.  This extension is important because it eliminates many questions related to late entity classification elections, for instance where “off-the-shelf” entities are used.

No Retroactive Election for Per Se Corporations Until Conversion

One must remember, however, that no entity classification elections can be made for per se corporations.  Consequently, even if an entity converts from being a per se corporation to being an eligible entity, the effective date of the entity classification election cannot be prior to the date of the conversion.

S Corporations

An eligible entity may qualify for alternative relief under Treas. Reg. § 301.7701-3(c)(1)(v)(C), which treats an entity as having made a classification election to be treated as a corporation when it timely elects to be an S corporation under Code § 1362(a)(1).  Also, see Revenue Procedure 2004-48 and Revenue Procedure 2007-62 for special rules applicable to late S corporation elections and late entity classification elections.

Private Letter Rulings

An entity that does not satisfy the requirements for relief under Revenue Procedure 2009-41 may request relief by applying for a letter ruling.  However, the I.R.S. user fees (not to mention advisor fees) for private letter rulings can be significant.

Importance for Foreign Entities

This new relief is very helpful for many taxpayers that form entities outside the United States without first obtaining thorough U.S. tax advice.  Often it is beneficial to make entity classification elections for foreign entities, but taxpayers may not be immediately made aware of the benefits of such an election.  Importantly, however, certain requirements must be met to obtain relief under Revenue Procedure 2009-41 and not all taxpayers may qualify for such relief.

Bulgarian Aktsionerno Druzhestvo Added To Per Se Corporation List

On March 20, 2008, the Treasury Department published Treasury Decision 9388.  The T.D. updated the per se corporation list to include Bulgarian aktsionerno druzhestvos.  The per se corporation list already includes a Societas Europaea or SE.  See Treas. Reg. § 301.7701-2(b)(8).

With respect to many issues, EU regulations defer to the laws of the country in which the SE has its registered office.  An SE must have a registered office in one of the Member States of the European Economic Area, which includes Norway, Iceland, Liechtenstein, and every country in the European Union.  With the entry of Bulgaria into the European Union on January 1, 2007, an SE can now have its registered office in Bulgaria.

Bulgaria's SE is called an aktsionerno druzhestvo.  The IRS and the Treasury Department stated in Notice 2007-10 that Treas. Reg. § 301.7701-2(b)(8) would be modified to include the aktsionerno druzhestvo on the per se corporation list.  The temporary regulations in T.D. 9388 make that modification.