US Inbound: Separate business entities

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US Inbound: Separate business entities

fuller.jpg

forst.jpg

Jim Fuller


David Forst

The IRS National Office in LTR 201305006 ruled that an agreement between a US and foreign corporation gave rise to a separate business entity. While the arrangement was a US outbound investment, a similar arrangement could give rise to material US tax issues if it involves inbound investment. The ruling addresses two parties, a US corporation (taxpayer) and its foreign affiliate (affiliate) that entered into a profit participation agreement under which the affiliate would acquire a profits and capital interest in all of taxpayer's branches in a certain region in exchange for a cash investment. The ruling states that no separate juridical legal entity will be created as a result of the agreement and thus taxpayer will retain legal ownership of all assets, liabilities, and contractual obligations of the branches.

The agreement was to be governed by foreign law. The taxpayer and affiliate agreed to exclusive jurisdiction of foreign courts in respect of any matter arising out of the agreement.

The IRS ruled that the Agreement will create a separate business entity for federal income tax purposes (even though no separate juridical entity was created), and that it will be treated as a foreign entity. The ruling is consistent with US tax law, which provides that a separate entity can be created, irrespective of classification of the entity under local commercial law, if two or more parties jointly conduct a business in which they each have a proprietary interest. Commissioner v. Culbertson, 337 US 733 (1949).

In the ruling, the taxpayer stated that a check-the-box election would be made to treat the business entity formed by the Agreement as a corporation for US federal income tax purposes. If such an election had not been made, the entity would have been treated as a partnership.

If the income of the business entity included income that was effectively connected with a US trade or business (and in the case of a treaty, attributable to a permanent establishment), then the foreign member, absent the corporate check-the-box election, would have been subject to US income and branch profits tax. Therefore, US inbound investors would be well advised to be sensitive to arrangements that may give rise to a separate business entity for US tax purposes.

Jim Fuller (jpfuller@fenwick.com)

Tel: +1 650 335 7205

David Forst (dforst@fenwick.com)

Tel: +1 650 335 7274

Fenwick & West

Website: www.fenwick.com

more across site & shared bottom lb ros

More from across our site

The arrival of a seven-strong team from Baker McKenzie will boost WTS Germany’s transfer pricing capabilities and help it become ‘a European champion’, the firm’s CEO said
Germany has forgotten to think about digital reporting requirements, a WTS partner claimed at ITR’s Indirect Tax Forum 2025
E-invoicing is currently characterised by dynamism, with fragmentation acting as a key catalyst for increasing interoperability, says Aida Cavalera of the International Observatory on eInvoicing
Pillar two and the US tax system ‘could work in harmony’, Scott Levine tells ITR in an exclusive interview to mark his arrival at Baker McKenzie
Peter White, who has a tax debt of A$2 million, has been banned for five years from seeking registration with Australia’s Tax Practitioners Board (TPB)
Wopke Hoekstra’s comments followed US measures aimed against ‘unfair foreign taxes’; in other news, Grant Thornton and Holland & Knight made key tax partner hires
An Administrative Review Tribunal ruling last month in Australia v Alcoa represents a 'concerning trend' for the tax authority, one expert tells ITR
A recent decision underlines that Indian courts are more willing to look beyond just legal compliance and examine whether foreign investment structures have real business substance
Following his Liberal Party’s election victory, one source expects Mark Carney to follow the international consensus on pillar two, as experts assess the new administration
A German economics professor was reportedly ‘irritated’ by how the Finnish ministry of finance used his data
Gift this article