IRC 7701 Check-the-Box Elections for Foreign Pass-Through Entities: Structuring Hybrid Entities for Tax Planning

The Section 7701 "check-the-box" provisions for entity selection are a powerful tax planning tool available to U.S. taxpayers conducting operations through subsidiaries outside the U.S. For taxpayers with foreign activities, the ability to create an entity structure to minimize or defer taxes is an integral component of cross-border tax tactics.

While the regulations provide great flexibility for U.S. taxpayers engaging in foreign business, tax counsel must grasp the practical aspects of the rules to maximize tax benefits.

Section 7701 provides default classification rules for eligible entities, but allows certain entities to elect how they will be classified for U.S. tax purposes. Most single-member disregarded entities, entities operating as trusts, and foreign entities organized as a corporation and offering unlimited liability to all its shareholders are not eligible for check-the-box entity selection. However, most eligible pass-through entities may use a check-the-box election.

A foreign entity subject to U.S. tax must make its initial election when it becomes "relevant." A foreign entity becomes relevant when the entity impacts the U.S. tax liability of any person for either payment or informational return purposes.

A significant benefit of check-the-box rules is the ability of U.S. multinationals to engage in cross-border tax arbitrage through the creation of "hybrid entities." These entities are treated one way in a foreign jurisdiction and another by the U.S. By managing the entity status of various foreign holdings, U.S. multinationals can achieve U.S. tax savings.

Listen as our experienced panel provides thorough and practical guidance on the check-the-box regulations of Section 7701.