US Inbound: Separate business entities

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2026

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

Magnus Pantzar is set to join as managing director after spending nearly a decade as EQT’s global head of tax
The OECD’s project was up for debate as Matt Williams spoke to ITR following BDO’s tax strategist survey, which uncovered increased complexity and costs among multinationals
Sponsored by Deloitte
Sameer Nurmohamed, partner, Deloitte Legal Canada
Sponsored by Deloitte
George Ankomah, partner, Tax & Regulatory Services, Deloitte Africa (Ghana)
The recent spree of firm mergers and acquisitions proves that geographic scale is the name of the game
The big four spin-off firm becomes Taxand’s second UK member; in other news, Haynes Boone launched a UK tax practice
Sponsored by Deloitte Luxembourg
Jean-Michel Henry and Mona El-Begawi of Deloitte Luxembourg examine the complexities created by timing differences in Luxembourg, EU, and OECD tax regimes
Stephanie Pantelidaki’s economic expertise will give Norton Rose Fulbright’s other teams ‘extra firepower,’ she says
Sponsored by MFA Legal & Tech
Samuel Fernandes de Almeida of MFA Legal & Tech assesses whether Portugal’s 7.5% surcharge on non-residents aligns with the EU’s free movement of capital principle and passes the proportionality test
Sponsored by McCarthy Tétrault
Senior McCarthy Tétrault tax practitioners highlight significant updates and implications for multinationals as Canada’s transfer pricing rules become more closely aligned with OECD guidance
Gift this article