Update on U.S. classification of U.K. LLCs.

• Author: Blum, Richard A.
• Position: Limited liability companies

For U.S.-based multinational businesses, a key tax planning technique is the use of hybrid entities for foreign joint ventures. Generally, the goal is to structure the foreign entity so that it is classified as a corporation under foreign law and a partnership under U.S. law.

Foreign limited liability companies (LLCs) are popular for joint ventures, since they provide liability protection and the applicable foreign statutes usually permit restrictions on free transferability of interests and continuity of life. Under Regs. Sec. 301.7701-2, an unincorporated business entity that lacks the two corporate characteristics of free transferability of interests and continuity of life will be classified as a partnership for U.S. tax purposes.

Rev. Rul. 93-4 held that a German GmbH lacked continuity of life because its memorandum of association required dissolution on the bankruptcy of either "shareholder" (called quotaholders) "without further action." (Emphasis added.) (See the Tax Clinic item, "Update on U.S. Classification of German Entity," TTA, May 1993, at 315.)

Regs. Sec. 301.7701-2(b)(1) states that

. . . continuity of life does not exist notwithstanding the fact that a dissolution of the limited partnership may be avoided, upon such an event of withdrawal of a general partner, by the remaining general partners agreeing to continue the partnership or by at least a majority in interest of the remaining partners agreeing to continue the partnership.... Thus, the regulations appear not to take the concept of "further action" into account, by stating that there is no continuity of life

even though "further...