Stephen C. Fox, retired
U.S. International Tax
Steve Fox has retired
   International Tax      Check the Box Election

Check the Box Election

International tax planning often involves hybrid entities.  IRS regulations currently permit a foreign or U.S. business entity to elect treatment as either a flow-through entity or a corporation. The election is made by filing Form 8832 to make a Check the Box election for desired treatment.  If no election is made, the type and place or organization of the entity controls the default treatment.  This treatment applies for Federal and most state income tax purposes, but not for any other purposes.


Disregarded Entity

Separate existence of a single member flow-through entity is disregarded.  The check the box entity is treated as merely a part of its owner, like another pocket in the same pair of pants.  This has broad implications.  Income and expense of the entity flow-through to the owner.  Transactions between the entity and the owner or other disregarded entities are considered not to exist.  Under the 2007 protocol to the U.S./Canada income tax treaty, a payment by a Canadian disregarded entity to its owner may not qualify for reduced withholding tax.
Watch a video on  disregarded entities. 


Multi-Member Check the Box Entities

Members of a multi-member flow-through entity are treated like partners in a partnership.  As such, they include their shares income and expense in their taxable income.  Members of a corporate entity are treated as shareholders.  They recognize income of the entity only when it is distributed (subject to Subpart F and PFIC rules).


Changes to entity status are permitted.  However, changing the status of an entity may result in taxable events, such as a deemed liquidation or deemed sale.


Check the box is a powerful international tax planning tool in structuring international operations. Differences in entity characterization for U.S. versus non-U.S. purposes may significantly reduce taxes and tax compliance costs.  Owners of checked entities often get flow through without disclosure of owners' financial information.  See the Journal of Taxation article in this site.


Rumors of changes to the Check the Box regulations abound.  However, based on a speech by Treasury's International Tax Counsel in the fall of 2009, the administration  may not have decided what they want to do, let alone how to do it.
Jobs Bill May Limit FTC Following Acquisition of Hybrid or 338 or 754 Election
The Jobs bill that passed and was signed August 10, 2010, contained a provision disallowing part of foreign tax credit following asset acquisitions resulting in basis step up.  This includes acquisition of shares of a hybrid (checked) entity, acquisitions subject to 338 elections, and formation of partnerships involving 754 elections.  The disallowance is essentially equal to the step up divided by foreign taxable income times foreign tax. Planning in acquisitions is more important than ever.


Steve Fox, an international tax adviser with 30+ years experience, can help you determine which Check the Box elections will improve your international tax planning.