Converting a Disregarded Foreign Entity to a Corporation: More than Just Checking the Box

Abstract

United States multinational companies (“MNCs”) often choose to operate in a foreign country through an entity formed under local law that is treated as a disregarded entity for U.S. federal tax purposes. As a result, the foreign entity’s activities are treated in the same manner under U.S. federal tax rules as those of a sole proprietorship, branch or division of the owner — the MNC.

Although operating in a foreign country through a disregarded entity can be advantageous, at some point the MNC may conclude that this is no longer the case. In such cases, the MNC may want the foreign entity to file an entity classification election (on Internal Revenue Service Form 8832) to be treated as an association taxable as a corporation for U.S. federal income tax purposes.

In general, changing the classification of a foreign entity in this manner is a deemed transaction described in section 351 of the Internal Revenue Code. This article discusses the numerous U.S. federal income tax consequences that result from a deemed section 351 transaction.

Keywords: Corporate Taxation, Entity Classification, International Taxation, Outbound Transfers

JEL Classification: H25