Check-the-box: European options, U.S. and European consequences.

• Author: Zink, William J.

From an international perspective, the new check-the-box regulations present U.S. multinational taxpayers with the opportunity not only to clean up their European structures in terms of electing partnership or branch treatment for a wide array of foreign entities, but also to present planning opportunities that include (among others) the alternatives illustrated in the charts on pages 80-81.

Although these charts offer interesting and perhaps tax-saving maneuvers for a U.S. entity with European operations, caution should be exercised from both a U.S. and European perspective.

Some of the charts indicate that all European operations would be consolidated into a single European entity with multiple branches located throughout Europe. This could cause an acceleration of U.S. income tax on European profits as a result of applying the de minimis, full inclusion rules of subpart F on a consolidated basis, as well as computing European earnings and profits on a consolidated (rather than on a company-by-company) basis when deficits exist in specific locations.

A recent European judicial decision may also affect European reorganizations tending towards a branch format. The Belgian Supreme Court ruled that losses realized by the Belgian operations of a Belgian company with a profitable permanent establishment in the Netherlands should be reduced by the amount of the profit exempt by virtue of the Belgian-Dutch Treaty. Although this case is specific to the two countries involved, it can have pan-European implications, since other jurisdictions within Europe often follow similar guidelines.

In this decision, the issue was the extent to which a Belgian company with a Dutch permanent establishment could deduct previously incurred losses in Belgium from profits later realized in Belgium. This issue can be illustrated by the following table:

Belgian Dutch Total Year profits profits profits 19X1 -50 +30 -20 19X2 -20 +50 +30 19X3 +100 +70 +170 Total 30 150 180

The profit attributable to the Netherlands permanent establishment was taxable in the Netherlands under the Belgian-Netherlands Income Tax Treaty.

For 19X3, the company claimed a deduction for a net operating loss carry-forward of 70, thus reducing the taxable base to 30. However, the tax authorities disallowed...