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

AI, pillar two and joint audits could define the next era of tax controversy, says Baker McKenzie tax partner Ariane Calloud
Gregor McMillan of Howden explains how insurance-backed financing can help businesses and funds unlock liquidity from tax receivables and other contingent claims
The arrival of Alex Anderson swiftly follows that of funds tax specialist Stuart Alter and suggests the Tier 3-ranked firm has higher ambitions
One of the two appointments is EY’s Gordon McIntosh, who becomes the big four firm’s second senior tax departure in September
Balson's move from a Tier 1 practice to a Tier 3 competitor looks counterintuitive. The market data suggests it is anything but
Awards
It was another banner year for Deloitte, which picked up more awards than any other firm at a gala ceremony held at The Londoner in Leicester Square
The big four firm has been embroiled in a scandal over partners’ misuse of confidential board papers to pitch for and win corporate audits for Westpac and Dexus
Drawing on lessons from the PepsiCo case, tax lawyer Paul McNab explains why the ATO's latest royalty guidance should concern multinationals well beyond the technology sector
As pillar two exposes the limits of fragmented tax processes, organisations are rethinking their operating models to create the trusted data foundations that AI demands
World Tax data shows Matt Donnelly is moving from a Tier 3 transactional tax practice to a Tier 1 market leader, underlining Kirkland & Ellis’s pull at the top end of the market
Gift this article