Entity classification election

An entity, which is eligible to make an election, is referred to as an eligible entity. Generally, a corporation organized under U.S. federal or state statute (and referred to as a corporation, body corporate or body politic by that statute) is not an eligible entity. However, the following types of business entity are treated as eligible entities: • American Samoa, Corporation • Argentina, Sociedad Anónima • Australia, Public Limited Company • Austria, Aktiengesellschaft • Barbados, Limited Company • Belgium, Naamloze Vennootschap/Société Anonyme/Aktiengesellschaft • Belize, Public Limited Company • Bolivia, Sociedad Anónima • Brazil, Sociedade Anónima • Bulgaria, Aktsionerno Druzhestvo. • Canada, Corporation and Company • Chile, Sociedad Anónima • People's Republic of China, Gufen Youxian Gongsi • Republic of China (Taiwan), Ku-fen Yu-hsien Kung-szu • Colombia, Sociedad Anónima • Costa Rica, Sociedad Anónima • Cyprus, Public Limited Company • Czech Republic, akciová společnost (or a.s. or akc. spol.) • Denmark, Aktieselskab • Ecuador, Sociedad Anónima or Compañía Anónima • Egypt, Sharikat Al-Mossahamah • El Salvador, Sociedad Anónima • Estonia, Aktsiaselts • European Economic Area/European Union, Societas Europaea • Finland, Julkinen Osakeyhtio/Publikt Aktiebolag • France, Société anonyme • Germany, Aktiengesellschaft • Greece, Anonymos Etairia • Guam, Corporation • Guatemala, Sociedad Anónima • Guyana, Public Limited Company • Honduras, Sociedad Anónima • Hong Kong, Public Limited Company • Hungary, Reszvenytarsasag • Iceland, Hlutafelag • India, Public Limited Company • Indonesia, Perseroan Terbuka • Ireland, Public Limited Company • Israel, Public Limited Company • Italy, Società per Azioni • Jamaica, Public Limited Company • Japan, Kabushiki Kaisha (kabushiki gaisha) • Kazakhstan, Ashyk Aktsionerlik Kogham • Republic of Korea, Chusik Hoesa • Latvia, Akciju sabiedrība • Liberia, Corporation • Liechtenstein, Aktiengesellschaft • Lithuania, Akcine Bendrove • Luxembourg, Société anonyme • Malaysia, Berhad • Malta, Public Limited Company • Mexico, Sociedad Anónima • Morocco, Société anonyme • Netherlands, Naamloze Vennootschap • New Zealand, Limited Company • Nicaragua, Compañía Anónima • Nigeria, Public Limited Company • Northern Mariana Islands, Corporation • Norway, Allment Aksjeselskap • Pakistan, Public Limited Company • Panama, Sociedad Anónima • Paraguay, Sociedad Anónima • Peru, Sociedad Anónima • Philippines, Stock Corporation • Poland, Spolka Akcyjna • Portugal, Sociedade Anónima • Puerto Rico, Corporation • Romania, Societate pe Actiuni • Russia, Otkrytoye Aktsionernoy Obshchestvo (Открытое акционерное общество) • Saudi Arabia, Sharikat Al-Mossahamah • Singapore, Public Limited Company • Slovak Republic, Akciova Spolocnost • Slovenia, Delniska Druzba • South Africa, Public Limited Company • Spain, Sociedad Anónima • Surinam, Naamloze Vennootschap • Sweden, Publika Aktiebolag • Switzerland, Aktiengesellschaft • Thailand, Borisat Chamkad (Mahachon) • Trinidad and Tobago, Limited Company • Tunisia, Société anonyme • Turkey, Anonym Şirket • Ukraine, Aktsionerne Tovaristvo Vidkritogo Tipu • United Kingdom, Public Limited Company • United States Virgin Islands, Corporation • Uruguay, Sociedad Anónima • Venezuela, Sociedad Anónima or Compañía Anónima In 2013, the IRS added a Croatian to the list of per se corporations. ==Default classification==

An eligible entity is classified for federal tax purposes under the default rules described below unless it files Form 8832 or Form 2553, Election by a Small Business Corporation, to elect a classification or change its current classification. The IRS uses the information entered on the form to establish the entity's filing and reporting requirements for federal tax purposes. Certain domestic and foreign entities that were in existence before January 1, 1997, and have an established federal tax classification generally do not need to make an election to continue that classification. If an existing entity decides to change its classification, it may do so subject to the 60-month limitation rule. Unless an election is made on Form 8832, a domestic eligible entity will be classified by default as: If an entity has been operating under one classification for some time, but then elects to change its classification, there may be tax consequences. The initial regulations were unclear on this point, so the IRS issued Revenue Rulings 99-5 and 99–6 in 1999 to address questions surrounding the conversion of an LLC to a partnership and vice versa. ==Use in international tax planning==

The "check-the-box" regulations paved the way for various new tax avoidance and tax deferral strategies. Specifically, they expanded the opportunity for "hybrid branch" or "hybrid entity" strategies, which take advantage of differences in the classification of an entity as a corporation or not in multiple jurisdictions, in order to engage in cross-border tax arbitrage. The possibility that the check-the-box rules would greatly expand the potential for such strategies had been pointed out prior to implementation, and at one point some commentators suggested disallowing foreign entities from electing their classification at all; however, in the end, the IRS, while acknowledging such concerns, issued regulations which gave foreign and domestic entities largely similar powers to elect their own classification. This arrangement may be used to shift income between the two non-American jurisdictions and avoid local taxes in one or the other, e.g. through thin capitalization. For US owners with foreign subsidiaries, choosing to have a subsidiary treated as a disregarded entity is not always the most beneficial tax-planning choice, however. For example, if a US taxpayer owns a disregarded foreign entity, its income will be taxed at the owner's ordinary US income tax rates, less the foreign tax already paid. This may result in every marginal dollar being taxed at the highest rate. However, if the foreign entity had elected to be taxed as a corporation (or been classified as such by default), paid a low rate tax in the foreign country, then repatriated its income to the US by paying qualified dividends to its owner, the total proportion of tax paid on income might actually be less, as qualified dividends are only taxed at 15%. However, this treatment is only available for dividends from corporations in certain countries, and is set to sunset in 2010 under the Tax Increase Prevention and Reconciliation Act of 2005. Foreign owners of US corporations also benefit from the ability to have entities normally treated as flow-through instead be taxed as corporations by the IRS. In what is sometimes known as a "domestic reverse hybrid" strategy, a non-US corporation may set up a US holding company which elects to be treated as a corporation for US tax purposes, but which its home country tax law sees as a flow-through entity. The US holding company receives a loan from its home country parent which it invests in a US operating subsidiary; the US holding company receives dividends from the US operation subsidiary and pays interest to the non-US parent. US tax law thus sees a US company making a dividend payment to another US company (which is thus not subject to withholding tax, unlike a dividend paid to a foreign company) which then pays interest to a foreign company, while the home country tax law will see a US company paying dividends directly to its home country parent. Under typical treaties for the relief of double taxation, neither government has the right to tax the payment, because each sees it as a type of payment which only the other has the right to tax. ==History==

Prior to 1996, whether domestic and foreign entities were classified as corporations was based on a six-factor test which looked at: • limited liability; • continuity of life; • free transferability of interests; • centralized management; • associates; • objective to carry on business for joint profit An entity which had a preponderance of the first four factors (the last two, in practice, were shared by all business entities) was treated as a corporation, otherwise as a partnership or an association. In practice, however, this test was easily manipulated. There were three conditions for this grandfathering: However, various tax professionals opposed the changes, arguing that the threshold for defining an extraordinary transaction was far too low, and that existing internal revenue regulations, as well as common law doctrines such as the principle of substance over form and the step transaction doctrine, were already sufficient to combat any abuses of the check-the-box rules. President Barack Obama attempted to revive the IRS' 1998 notice in his proposed 2010 budget. The proposal was eventually dropped again due to criticism from businesses, and it was not included again in the 2011 budget proposal either. ==References==