Global Tax Alert | 2 July 2013

Check-the-Box Regulations will be amended to add Croatian Dionicko Drustvo entity to per se corporation list

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Executive summary

On 27 June 2013, the Internal Revenue Service (IRS) released Notice 2013-44 (Notice),1 which announces that Treasury and IRS will revise the entity classification regulations by adding the Croatian dionicko drustvo (DD) to the list of entities that are always treated as per se corporations for US federal tax purposes.2 The regulations will apply to all DDs formed on or after 1 July 2013. They will also apply to DDs formed before 1 July 2013, but only upon an aggregated 50 percent-or-greater change of ownership subsequent to 1 July 2013.

Detailed discussion

On 18 December 1996, final regulations were issued addressing the classification of business entities under Section 7701 (the check-the-box regulations).3 Under the check-the-box regulations, a business entity that is not classified as a corporation generally can elect its classification for US federal tax purposes. Treas. Reg. Section 301.7701-2(b)(8), however, provides a list of foreign business entities that are always classified as corporations for US federal tax purposes (the per se corporation list).

On 16 December 2005, final regulations4 (2005 final regulations) were published that added the European public limited liability company, or Societas Europaea (SE), to the per se corporation list. The addition was in response to the Council of the European Union’s (EU) authorization for such new business entity.5 Under EU law, an SE must generally have a registered office in one of the Member States of the EU or in one of the countries of the European Economic Area (which includes all Member States of the EU plus Norway, Iceland, and Liechtenstein). Additionally, an SE is subject to the laws for public limited liability companies for the country in which the SE has its registered office, to the extent that EU regulations regarding SEs do not address particular legal issues that may arise. The IRS and the Treasury Department stated in Notice 2004-686 that an SE is properly classified as a per se corporation for US federal tax purposes and concluded that the list of per se entities should be expanded to include a public limited liability company for those countries in which an SE may have its registered office. Thus, Notice 2004-68 and the subsequent regulations included certain public limited liability companies organized in Member States that did not already appear on the per se corporation list.7

When Croatia joins the EU on 1 July 2013, an SE will be eligible to have its registered office in Croatia. As a result, and consistent with the 2005 final regulations, the Notice announces that the IRS and Treasury will add Croatian DD to the per se corporation list in forthcoming temporary and proposed regulations.

The forthcoming regulations generally will apply to DDs formed on or after 1 July 2013. They will also apply to a DD formed before 1 July 2013, and upon an aggregated 50 percent-or-greater change of ownership subsequent to 1 July 2013. For purposes of the aggregated 50 percent-or-greater change of ownership test, an ownership interest means: (i) in the case of a partnership, a capital or profits interest; and (ii) in the case of a corporation, an equity interest measured by vote or value.

Implications

With this Notice, the IRS and Treasury have announced their intention to continue the policy of ensuring that every jurisdiction where an SE can have a registered office will be included on the per se corporation list. As with past revisions, the announced revision to the per se corporation list will be prospective. The revised regulations will generally apply to DDs formed on or after 1 July 2013. A DD formed prior to 1 July 2013, will be subject to a limited grandfather rule and will not be considered a per se entity (and thus could continue to determine its classification for US federal tax purposes based on relevant entity classification regulations), unless and until such a pre-existing entity has an aggregated 50 percent-or-greater change in ownership. Because the grandfather rule looks at changes in the aggregate, it will be important for taxpayers to monitor ownership changes.

No additional guidance has been provided with respect to the status of an SE. In particular, the IRS and Treasury have yet to provide guidance regarding where an SE is considered organized for applying the same country exceptions for Subpart F.

Endnotes

1. To be published on 15 July 2013 in IRB 2013-29.

2. Treas. Reg. Section 301.7701-2(b)(8).

3. See TD 8697 (1997-1 CB 215; 61 FR 66584) and Treas. Reg. Sections 301.7701-1 through 3.

4. See TD 9235 (2006-1 CB 338; 70 FR 74658).

5. Council of the European Union Regulation 2157/2001 2001 OJ (L 294). See TD 9197 (2005-1 CB 985; 70 FR 19697) and TD 9235 (2006-1 CB 338; 70 FR 74658).

6. 2004-2 CB 706 (October 7, 2004).

7. Those companies include: Estonian Aktsiaselts, Latvian Akciju Sabiedriba, Lithuanian Akcine Bendroves, Slovenian Delniska Druzba, and Liechtenstein Aktiengesellschaft. See also TD 9235, supra. Subsequent to the issuance of the 2005 final regulations, the Bulgarian Aktsionerno Druzhestvo was added to the list of per se corporation list because upon Bulgaria’s entry into the EU, the SE could have a registered office in Bulgaria. See TD 9433 (2008-2 CB 1263; 37 FR 72345).

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP, International Tax Services, Washington, DC
  • Peg O’Connor
    +1 202 327 6229
    margaret.oconnor@ey.com
  • Yuelin Lee
    +1 202 327 6378
    yuelin.lee@ey.com
  • David Macall
    +1 202 327 7055
    david.macall@ey.com

EYG no. CM3616