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.

1. Purpose of "check-the-box" entity election
2. Eligible entities
3. Relevance determination for foreign entities
4. Hybrid entities and tax planning opportunities
5. Income transfer opportunities out of Subpart F
6. Making retroactive entity selection or reevaluation

The panel will discuss these and other important issues:

• How check-the-box elections facilitate the creation of "hybrid" entities
• Utilizing check-the-box elections to structure transactions to pull foreign-source income out of Subpart F treatment
• Retroactive entity selection and completing Form 8832
• How to determine whether a foreign entity is "relevant" for U.S. taxation purposes

Learning Objectives

After completing this course, you will be able to:

• Identify the types of foreign entities eligible for check-the-box entity election for U.S. income tax purposes
• Discern the tax consequences of entity choices for foreign companies
• Determine the standards for whether a foreign entity is "relevant" for U.S. tax considerations
• Recognize the circumstances for establishing a "hybrid" foreign entity
• Decide when a retroactive entity change would produce favorable tax results

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, supervising other attorneys, preparing complex corporate tax forms and schedules, and corporate entity structuring. Specific knowledge and understanding of foreign entity structures and U.S. ownership and attribution rules; familiarity with default entity classification rules for eligible entities; familiarity with Subpart F rules and concepts of cross-border tax arbitrage

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IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).