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 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 EU defended its ‘sovereign right’ to impose the tax in the face of US tariff threats; in other news, the US deputy Treasury secretary resigned after just five months
Ascoria’s chief revenue officer shares her career wisdom garnered from the disparate worlds of tax technology, electric cables, radio DJing and more
Businesses no longer have a choice when it comes to tax technology transformation. Pavlo Boyko of TMF Group says the question is simply: sink or swim?
The firm is hunting for a senior TP manager in its quest to build a full-service practice in Indonesia, A&M Tax’s Jakarta head Jaap Zwaan tells ITR
With a new government in place, the evolving tax landscape presents both opportunities and challenges for taxpayers
Major economies have expressed concerns, with China arguing a US global minimum tax exemption would be a violation of the principle of fair competition – ITR understands
Senator Richard Colbeck told ITR he was concerned by the decision to let PwC Australia tender for government contracts again after a scandal-induced ban
Whether it be due to a fragmented advisory market or a rise in M&A, Italy’s frenetic hiring has not gone unnoticed by ITR’s Talent Tracker
The deal gives Azets 14 new partners and boosts its Swedish revenues to over $100 million; in other news, Svalner Atlas launched in Copenhagen
The tax technology company will be providing a free demonstration of its OTP software and offering best practice advice on whether to ‘buy or build’ on September 8
Gift this article