The
JacobsReport
is a free email newsletter that will discuss investment, business, tax
and financial planning in an international context. Reports will be
issued
as the author's work schedule permits, but will usually be issued on a
weekly schedule.
Eligible
Entities to Elect out of
Corporate Tax Status
QUESTION:
Can an IBC make an election to be treated as a disregarded
entity by the IRS?
REPLY: Probably.
For those not familiar with the election to be treated as a disregarded
entity,
the IRS permits certain eligible entities to choose whether it will be
taxed as
a corporation or as a partnership (multiple owners) or as a disregarded
entity
(one owner). Certain types of entities referred to as "per-se"
corporations are not eligible to make this election.
As I understand it, an IBC (International Business Company) is not
allowed to
transact business in the host country other than to provide
administrative or
investment services to entities in other countries. Therefore, an IBC
will
rarely be an in-eligible entity for the check-the-box election.
Translation; an
IBC will be an eligible entity to make an election to be a disregarded
entity
for U.S.
tax purposes. If the entity has more than one owner it will be treated
as a
foreign
partnership for U.S.
tax purposes. If it has only owner, it will be disregarded and the
income and
expenses will be reported on a Schedule C (except for certain
investment
income) for the U.S.
owner.
A corporation will usually be treated as a resident of the host country
and
will be able to transact business in that country, as well as in other
countries. Certain types of corporations in various countries are not
eligible
to make an election to be treated as a non-corporation for U.S.
tax
purposes. These entities are listed in
IRS Reg. Section 301.7701-2. I haven't been able to find a copy of that
regulation on the IRS web site, but one is available at
http://taxalmanac.org/index.php/Reg._301.7701-2
An eligible entity is one that is NOT on the IRS list.
South American corporations that are described as a Sociedad Anonima or
S.A.
corporation are not eligible to make an election to be taxed as a
partnership
or disregarded entity.
Further details are provided in the instructions to Form 8832, which is
used to
make the election. The election is made by the various U.S.
shareholders
(or members in the case of a foreign LLC) and should be made within 75
days
after forming the entity.