The dual consolidated loss quandary.

• Author: Kubitz, Adam

Globalization has led United States-based organizations to have legal entity structures that span the globe. U.S.-based businesses are constantly expanding into overseas markets. Reasons for expansion can vary greatly, but often they are tied to new market opportunities, enhanced procurement possibilities, and/or access to a cost-effective labor pool. Once a U.S.-based business has decided to enter a foreign country, it generally has several options for establishing a presence in the host country. Under most countries' laws, corporations, partnerships, branches, or some combination thereof can be established to conduct business. The choice of the type of legal entity to establish in a foreign country is usually contingent upon a number of tax and legal requirements. The legal entity should carefully consider all of the organization's needs, including, but not limited to, local employment law, currency restrictions, and intellectual property law. Once a legal entity has been formed in the foreign jurisdiction, the entity must determine how it will be treated for U.S. tax purposes.

Check-the-Box Regulations

Generally, under Regs. Sec. 301.77011, commonly referred to as the "check-the-box" regulations, the foreign entity can elect how it is treated for U.S. tax purposes. The regulations allow an entity to be treated differently for U.S. tax purposes than for the host country's tax purposes. For instance, a foreign entity that is incorporated in India as a private limited company is generally taxed as a corporation under Indian tax law. Notwithstanding the Indian characterization, the check-the-box rules in the United States allow the foreign entity to elect to be treated as a pass through entity for U.S. tax purposes. If the foreign entity has two owners, it will be treated as a partnership. If the foreign entity has one owner, it will be treated as a disregarded entity. On the other hand, an Indian partnership, for example, could elect to be taxed as a corporation in the United States. The regulations do not allow certain foreign entities to make this election; however, a discussion of these entities is beyond the scope of this item.

If a U.S. corporation owns all the outstanding interest in a foreign legal entity that is eligible and elects to be treated as a pass through entity, it becomes disregarded for virtually all U.S. tax purposes. As a result, when the U.S. owner files its U.S. tax return, the U.S. owner includes all the foreign...