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

It should be easy for advisers to be transparent about costs, Brown Rudnick partner Matthew Sharp said in response to exclusive ITR in-house data
The sprawling legislation phases out Joe Biden-era green tax incentives for businesses; in other news, the UK will reportedly maintain its DST despite US pressure
New French legislation should create a more consistent legal environment for taxing gains from management packages, say Bruno Knadjian and Sylvain Piémont of Herbert Smith Freehills Kramer
The South Africa vs SC ruling may embolden the tax authority to take a more aggressive approach to TP assessments, an adviser tells ITR
Indirect tax professionals now rate compliance as a bigger obstacle than technology and automation; in other news, Italy approved a VAT cut on art sales
AI-powered tax agents are likely to be the next big development in tax technology, says Russell Gammon of Tax Systems
FTI Consulting’s EMEA head of employment tax and reward tells ITR about celebrating diversity in the profession, his love of musicals, and what makes tax cool
Canadian Prime Minister Mark Carney and US President Donald Trump have agreed that the countries will look to conclude a deal by July 21, 2025
The firm’s lack of transparency regarding its tax leaks scandal should see the ban extended beyond June 30, senators Deborah O’Neill and Barbara Pocock tell ITR
Despite posing significant administrative hurdles, digital services taxes remain ‘the best way forward’ for emerging economies, says Neil Kelley, COO of Ascoria
Gift this article