Entity Classification Election: Check the Box Regulations (Completed)

The so-called U.S. “Check-the-Box” regulations (Reg. §§ 301.7701–1 through –4) have made the difficult choice of business entity classification elective for taxpayers. Taxpayers may elect to have an entity treated as a corporation, a partnership, or a disregarded entity (if the entity has only one member) by checking a box on a prescribed form. This entity classification election is made by filing IRS Form 8832.

In December 1996, the Internal Revenue Service issued final regulations that allowed unincorporated entities to choose whether to be taxed as partnerships or as corporations. Prior to 1996, the classification of domestic or foreign entities as corporations was based on a complicated six-factor test which, in practice, was easily manipulated. The regulations permit “eligible entities” to choose among various business classifications. Both domestic and foreign businesses may be eligible entities if they meet the requirements of the regulations. For example, an eligible entity with at least two members can choose to be classified as either (1) an association taxable as a corporation or (2) a partnership. An eligible entity with a single member can choose to be (1) classified as an association taxable as a corporation or (2) disregarded as an entity separate from its owner.

Use in International Tax Planning
The U.S. check–the-box regulations create the possibility of a hybrid mismatch. Hybrid mismatches occur when the tax treatment of an entity or financial instrument differs between two taxing jurisdictions.

A common example of a hybrid entity mismatch occurs when a U.S. taxpayer makes a check-the-box election on its foreign subsidiary. This results in corporate treatment in the local country and disregarded or “transparent” status for U.S. tax purposes. This is a common structure for U.S. partnerships and S corporations, allowing for the use of foreign tax credits.
However, the possibility of such deliberately planned mismatches enables aggressive cross-border tax arbitrage. Unlike the rather benign foreign subsidiary election described above, more sophisticated mismatches create planning opportunities for “double non-taxation” where income may be exempt from tax in multiple jurisdictions. In 2015 when the 15 Base Erosion Profit Shifting (“BEPS”) Articles were finalized by the OECD, BEPS Article 2 dealt with hybrid mismatches. Article 2 set out recommended tax policy guidance aimed at counteracting the aggressive planning surrounding hybrid mismatch arrangements.

Implications for US Check-the-Box Structures
While BEPS addresses several abusive hybrid mismatches, there is uncertainty regarding how these guidelines will impact global structures of U.S.-based multinationals. Concerning to tax professionals are the restrictions against “deduction-without-inclusion” and “double-deduction” outcomes. Further complications may arise under the U.S. dual consolidated loss rules.

While Congress did not override the check-the-box regulations in the 2017 Tax Cuts and Jobs Act (“TCJA”), it imposed other constraints on the use hybrid entities. Given BEPS Article 2, anti-hybrid legislation will continue to spread internationally among OECD member countries. Only time will tell if practical guidance emerges regarding the application of these rules to nonabusive check-the-box structures.

Who Should Attend
Tax Directors, Tax Staff, Transfer Pricing Practitioners, Treasury, Internal Audit, Tax Attorneys, CPAs, and CFOs.

Topics Covered

• Entity Classification
• Eligibility requirements for a check the box election
• Hybrid entities
• Hybrid entity mismatches
• Cross Border Tax Arbitrage
• International Tax Planning opportunities from hybrid mismatches
• Anti-hybrid legislation initiatives
• TCJA and check the box rules
• BEPS and BEPS Article 2

Learning Objectives

• Recognize the eligibility criteria for check the box elections
• Describe Form 8832
• Recognize the default classification
• Describe the uses of check the box regulations in international tax planning
• Identify the Deduction-without-inclusion scenario and impact
• Identify the Double-deduction scenario and its outcome
• Identify the Dual consolidated loss scenario and its tax impact
• Describe the impact of the TCJA on check the box regulations
• Describe BEPS and the ramifications of BEPS Action 2 on check the box elections by US Multinationals
• Recognize what are "reverse hybrid" arrangements and how are they employed to avoid US withholding tax
• Identify the retroactivity of the check-the-box election

Level
Basic

Instructional Method
Group: Internet-based

NASBA Field of Study
Taxes (1 hour)

Program Prerequisites
None

Advance Preparation
None