Foreign Nationals Who Will Become US Tax Residents Now Have Greater Certainty on Check-The-Box Planning Prior to US Tax Residency

Foreign nationals, such as executives of foreign companies, are transferred to the US for training or other purposes. Those with ownership interests in foreign companies or partnerships often will (or should) review their investments and holdings prior to becoming a US tax resident to determine if pre-departure planning would be beneficial from a US tax perspective. In the past, changing how a legal entity is classified may have resulted in more favorable US tax results. This change is made by filing a Form 8832 and making an election as to the treatment prior to US tax residency. This is often referred to as making a “check-the-box” election.

Over the years, there was an issue as to when you were allowed to make this election since you often had not had any US taxation or reporting requirements. The issue was whether the foreign company or partnership you owned had any relevancy for US tax purposes – was this required before you could make the election?

The Office of Chief Counsel of the Internal Revenue Service released a memorandum (AM 2021-002) on April 2, 2021 clarifying this issue. It basically states an entity does not have to be relevant for US tax purposes to be able to make a “check-the-box” election. Furthermore, this election is considered an initial election (even though the entity has been in existence prior to the date of the election) so you do not have to wait 60 months to change to a different classification after this initial election. This may be important if you terminate your US tax residency within the 60-month period, or even if your reason for the initial election has subsequently changed and is no longer favorable. Of course, you need to consider the US tax consequences of changing the entity classification.

It should be noted the foreign company or foreign partnership will need to obtain a US Entity Identification Number (EIN) prior to filing the Form 8832. This number must be included with the form; writing “applied for” on the form does not work and the application will be rejected.

If you would like to talk to a Moore DM tax advisor about pre-departure planning and how this change might impact your plans, contact us today.

Thank you.

Doug Martin 2x3

Douglas Martin, Co-Author



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