Check-the-Box Elections for Foreign Entities

U.S. tax residents who own companies abroad are often confused about the “check-the-box” election. Some have filed years of returns treating a foreign company as disregarded without ever making it. Others assume it is always a good idea. In our experience, it depends on the facts, and getting it wrong is expensive.

What is a check-the-box election?

Treasury regulations allow an “eligible entity” to choose its U.S. tax classification: an entity with two or more owners can be a corporation or a partnership, and an entity with one owner can be a corporation or “disregarded as an entity separate from its owner” [2].

The choice is made on Form 8832 [1]. Certain foreign company types listed in the regulations are always corporations and cannot elect [2].

What is a foreign company if no election is filed?

Under the foreign default rule, an entity is a corporation “if all members have limited liability,” a partnership if it has two or more members and at least one lacks limited liability, and disregarded only if its single owner lacks limited liability [1].

Because most foreign companies our clients own shield their owners from liability, a foreign Ltd., GmbH, S.à r.l. or similar entity starts life as a foreign corporation for U.S. purposes. That triggers Form 5471, the information return for U.S. shareholders of foreign corporations [3].

Form 5471 or Form 8858?

Form 8858 is for U.S. persons who own a foreign disregarded entity, defined as a foreign entity “that is disregarded as an entity separate from its owner for U.S. income tax purposes under Regulations sections 301.7701-2 and 301.7701-3” [4].

For a limited-liability foreign company, that status exists only if a Form 8832 election was filed. Filing Form 8858 does not make the entity disregarded; the election does. Both forms carry a $10,000 penalty per entity per year for failure to file, and more after IRS notice [4], [3].

What if you filed Form 8858 but never filed Form 8832?

We see this regularly: three years of returns, each with a Form 8858 for a foreign company, and no Form 8832 or IRS acceptance letter in the file.

The IRS notifies the entity whether its election “is accepted or not accepted,” generally within 60 days of filing [1]. With no election, the entity remained a corporation by default, the Forms 8858 were the wrong form, and the Forms 5471 were never filed.

There are two paths. Late-election relief under Revenue Procedure 2009-41 is available if the only failure was not filing Form 8832 on time, all returns were filed consistently with the requested classification, there is reasonable cause, and “three years and 75 days from the requested effective date” have not passed [1], [5].

Otherwise, the options are a private letter ruling or treating the prior years as corporate years and electing going forward [1].

Why does timing matter?

1. Elect before the first return. Settle the classification before the owner’s personal return is filed, so the right form is attached from the start.
2. Mind the window. An election cannot take effect “more than 75 days prior to the date the election is filed, nor… later than 12 months after” [1].
3. Avoid mid-year changes. A mid-year election splits the year into a corporate short period on Form 5471 and a disregarded short period on Form 8858, and the corporation is deemed to distribute all of its assets and liabilities to its owner in liquidation on the effective date [1]. That is extra compliance with no benefit; elect for a full year or from formation.
4. Expect to be locked in. Once an entity changes its classification, it “generally cannot change its classification by election again during the 60 months after the effective date” [1].

Should you make the election at all?

Just because you can elect does not mean you should. The benefit of disregarded treatment is simplicity: the company’s income, losses and foreign taxes flow onto your personal return as though the entity did not exist, and Form 8858 reports the entity without a separate corporate tax computation.

Two situations argue against electing. If the entity is being dissolved anyway, an election adds a deemed liquidation on top of the real one and achieves nothing the dissolution does not.

And if the company holds appreciated assets, the deemed liquidation that accompanies a corporation-to-disregarded election can itself trigger tax [1].

This article is for general informational purposes only and does not constitute legal or tax advice. Reading it does not create an attorney-client relationship with Dilendorf Law Firm. Attorney Advertising.