Check-the-box got a little easier last month

Check-the-box got a little easier last month

September 01, 1998

US power companies investing offshore usually form an offshore holding company in a tax haven and then take steps to ensure that all entities below this holding company in the ownership chain are transparent for US tax purposes. This is usually a simple matter of filing a form with the IRS. However, IRS regulations require either that all shareholders in an offshore company must join in signing the form to treat the foreign company as transparent or else someone who is “authorized (under local law or the entity’s organizational documents)” can sign for it.

A problem arises frequently in places like China. No Chinese joint venture participant wants to sign an IRS form, and joint venture contracts usually fail to authorize someone to file US tax forms on its behalf.

The IRS said in a new private ruling that a board resolution authorizing someone to sign counts as “authority under local law.”

SOME CHECK-THE-BOX DETAILS still remain to be worked out.

The US allows taxpayers wide latitude to designate companies as corporations or partnerships or ignore them altogether. Companies in the last category are called “disregarded entities.” There are still many unanswered questions, including whether mergers involving disregarded entities should be treated as tax-free mergers under the same rules that apply where all the entities involved in the merger are corporations. The New York State Bar Association sent Treasury a list of five fact patterns recently on which it asked for guidance.

SOME STATES TAX “SUBPART F INCOME” just like the federal government.

The federal government will look through offshore holding companies and tax any passive income it sees in the ownership chain. Examples of passive income are interest and dividends. Such income is called “subpart F income.”

Nabisco argued in Illinois that it should not have to report subpart F income until the earnings are physically repatriated to the US. It lost recently before the Cook County circuit court. The court said the earnings have to be reported as part of the company’s tax base in Illinois at the same time they become taxable at the federal level. Nabisco is headquartered in Illinois.

Keith Martin