Hybrid entities: Practical application under the check-the-box regime

On December 17, 1996, the IRS and the Treasury Department issued final entity classification regulations (check-the-box regulations) under IRC Section 7701 allowing US taxpayers to elect to treat most business entities for US federal income tax purposes either as a corporation or a partnership or to disregard the entity. Eighty types of foreign business entities are specifically excluded from this elective system and are treated per se as corporations. The check-the-box regulations enhance international tax planning opportunities for US multinationals. As a result of the efficiencies and certainty created by these regulations, the steadily increasing use of "hybrids" in recent years to achieve various tax planning objectives should further expand in 1997 and after. A paper provides a guide to setting up and operating a foreign hybrid under the new check-the-box regime. A hybrid is an entity that a foreign jurisdiction treats as a corporation but that has elected to be taxed as a partnership or a branch for US federal income tax purposes.