Dual chartered entities and partnership tax treatment abuses

Dual-Chartered Entity Question Set

What is a dual-chartered entity?

When a government of jurisdiction issues a charter to form a corporation or other corporate entity, the newly formed entity must adhere to the laws, regulations, and tax codes pursuant to that jurisdiction's vested authority. There are several provisions of the United States tax code, however, that allow for a corporate entity to be formed in more than a single jurisdiction, and these so-called dual-chartered entities are bound by certain limitations, while being afforded other privileges and benefits. Scholarly research on the construction of current tax codes demonstrates that "the United States also has special rules for 'dual-chartered' entities (i.e., those entities that are treated as formed in more than one jurisdiction) ... See Treas. Reg. §301.7701-2(b)(9) (treating dual-chartered entities as per se entities under the entity classification regime)" (Rubinger, 2007), and it is important for those working in the finance industry to understand these rules and apply them accordingly throughout their professional consultations. Many advantages can be derived from forming a dual-chartered entity, because "similar to dual-resident companies, dual-chartered entities that are formed in the United States continue to be taxed as domestic corporations" (Rubinger, 2007).

2.) What are the potential abuses when a foreign entity chose to be treated as a partnership for U.S. tax purposes?

The entry of a foreign company into the lucrative U.S. market is an especially critical process for executives and financial analysts, because the U.S. tax code allows foreign entities to be treated in a number of distinct ways depending on how they are formed. When a foreign entity elects to be treated as a partnership for U.S. tax purposes, rather than a corporation, this decision can provide an opportunity to implement a number of advantageous tax planning strategies. It is true that "whether a foreign entity is a corporation or partnership for U.S. tax purposes affects the availability of deferral" (Amatucci, Gonzalez & Trzaskalik, 2006), because a partnership is not considered to be a taxpayer under U.S. law. There are several potential abuses that a savvy financial analyst can secure for a foreign entity that elects to be classified as a partnership, abuses which are made even more tempting by the relative simplicity of the classification process. The fact that U.S. investors abroad are afforded an extremely wide degree of latitude in terms of classifying their foreign entity, through the advent of so-called "check-the-box" legislation, has created an environment in which companies are free to establish their own preferred tax rates. For example, "if a foreign entity is regarded as a partnership, the income accruing to a U.S. participant will be immediately taxable in the United States even if no profits are repatriated" (Amatucci, Gonzalez & Trzaskalik, 2006), a provision which provides a series of loopholes for an observant financial analyst to identify and monetize.