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Thursday, November 3, 2011

Application of the Check-the-Box Regs to Foreign Entities

Tax AnalystsKenan Mullis (LL.M. Taxation 2011, Georgetown), Check-the-Box and Hybrids: A Second Look at Elective U.S. Tax Classification for Foreign Entities, 64 Tax Notes Int'l 371 (Oct. 31, 2011):
After significant debate, and despite their own expressed reservations, the IRS and Treasury extended the application of the final check-the-box regulations to foreign business entities, meaning that a foreign entity could choose how it would be taxed in the U.S. just as a domestic entity could. This policy choice has created significant cross-border tax planning opportunities. This article explores both the policy rationale behind the decision to include foreign entities under the CTB system and how well that rationale has held up in the 14-plus years since the final regulations were issued. More specifically, this article focuses on the use of hybrid entities -- single business entities that are treated inconsistently by two taxing authorities -- as vehicles for tax arbitrage after the promulgation of CTB.
Section I of this article provides a background on the CTB regulations in the domestic context and on how entities were classified before CTB. Section II discusses the policy supporting the extension of CTB to foreign entities, and it introduces concerns over the use of hybrid entities. Section III looks more deeply and more technically at the planning opportunities hybrids present within the framework of subpart F and the foreign tax credit. Finally, Section IV, with 14 years' hindsight, reexamines the arguments set forth to justify the extension of CTB to foreign entities in light of the concern over hybrids.

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