How Foreign Entities Are Classified for U.S. Tax

Classification choices and Form 8832

The check-the-box regulations allow many entities to elect classification as an association taxable as a corporation, a partnership, or a disregarded entity. A disregarded entity is not treated as separate from its owner for this classification purpose. The election is made by checking a box on Form 8832 and does not change the entity's legal corporate status.^[2]

These are federal tax classifications. Many entities may elect among these classifications, while the specific default rules depend on the entity's status under the classification regulations. Eligibility to choose all three classifications varies by entity.^[2]

A foreign eligible entity wholly owned by one owner can be a foreign disregarded entity if it defaults into that status or elects it. The IRS describes Form 8858 as required for each foreign disregarded entity. Its instructions identify U.S. persons with direct ownership, indirect ownership through disregarded entities, or specified relationships to a foreign corporation or partnership as possible filers, depending on the listed conditions.^[1]

Form 8858 reporting is distinct from entity classification itself. Form 8858 is an information return for U.S. persons with respect to foreign disregarded entities and foreign branches. Filing categories turn on the person's connection to the entity or branch, including direct ownership or specified filing status for another foreign entity.^[1]

Form 8832 is used to make an affirmative election for a foreign entity seeking partnership treatment.^[5]

• Corporation treatment means classification as an association taxable as a corporation under the check-the-box rules.^[2]
• Partnership treatment is one of the elective classifications available to many eligible entities.^[2]
• Disregarded treatment applies to a wholly owned foreign eligible entity that defaults into that status or elects it.^[1]

Partnerships and CFC income inclusions

The aggregate approach treats partners as directly deriving their distributive shares of partnership income. Under the entity approach, the partnership is treated as deriving income, which is then allocated to its partners. The two approaches differ on whose U.S. shareholder status counts for specified CFC inclusion rules. Under the entity approach it is the partnership's status, and under the aggregate approach it is each partner's status.^[4]

The 2018 proposed GILTI regulations used a hybrid aggregate and entity approach for U.S. partnerships and partners, addressing partnership level calculations and partner level treatment. The final GILTI regulations issued in 2019 replaced that hybrid approach with aggregate treatment of domestic partnerships for Section 951A. In an example of that hybrid approach, a partnership calculated an inclusion from its shares of CFC tested income, while a partner's treatment depended in part on whether that partner was a U.S. shareholder of the CFC.^[3]

The 2018 proposed GILTI rules would have required partner information reporting. A U.S. shareholder partnership would provide each partner its distributive share of the partnership's GILTI inclusion, if any. For a partner that is itself a U.S. shareholder, it would also provide the partner's proportional share of CFC tested items. This information would appear on or with Schedule K-1.^[3]

The final Section 958 regulations treat domestic partnerships in the same manner as foreign partnerships for income inclusions under Sections 951, 951A, and 956. Under this aggregate treatment, partners that are U.S. shareholders have Subpart F inclusions under Section 951(a). Thus, for these specified inclusion purposes, partner status matters directly.^[4]

Inclusion rules are distinct from determining CFC status. Domestic partnerships are treated as U.S. shareholders when determining whether a foreign corporation is a CFC under Section 957. That classification can apply even when no U.S. partner qualifies as a U.S. shareholder of that foreign corporation under Section 951(b).^[4]

Under a prior approach to Subpart F inclusions, a domestic partnership was treated as a separate entity. A domestic partnership that was a U.S. shareholder of a CFC had the inclusion, then allocated it to U.S. partners without looking through to whether those partners were U.S. shareholders. Taxpayers could also rely on the proposed regulations for earlier tax years, subject to a consistency rule.^[4]

Reading the rules together

Entity classification and partnership inclusion rules answer different questions. Form 8832 is the election form used for certain classification choices. The CFC rules then determine whether an inclusion is calculated at partnership level, partner level, or both, according to the applicable provision and shareholder status.^[2]

Form 8858 provides information reporting for foreign disregarded entities. For domestic partnerships, the final Section 958 rules address specified inclusions under Sections 951, 951A, and 956, while retaining separate entity treatment for certain Section 956 property characterization purposes.^[1]

Questions and answers

Related resources

Related glossary terms

• U.S. person: A U.S. person includes a U.S. citizen or resident alien, a domestic partnership or corporation, a domestic trust, or an estate other than a foreign estate.

Related articles and guides

• PFIC holdings and trust reporting: PFIC classification tests and related reporting apply to U.S. citizens with direct or indirect interests, including interests held through foreign trusts.

Tools and official documents

• IRS and FinCEN forms: reference pages: Reference pages for 15 IRS and FinCEN forms tied to foreign trusts, foreign accounts and entities, built from the official forms and their instructions.

Related pages

• Topic guides
• U.S. Reporting Forms for Foreign Entities
• When CFC and PFIC Rules Overlap
• GILTI and net CFC tested income
• How CFC Ownership Can Lead to GILTI Inclusions
• Austria private foundations and U.S. reporting requirements: An Austrian private foundation raises local tax questions and separate U.S. reporting duties for a U.S. citizen who contributes property or receives a payment.