Washington Tax Alert May 23, 2014 (joint venture arrangments)

Washington Tax Alert from Don Barnes, [email protected]

May 23, 2014

The Service has issued private letter rulings holding that a contractual arrangement in the form of a joint venture or other collaboration between two parties constitutes a separate business entity for Federal income tax purposes.  The contractual arrangement may involve unrelated parties or related parties.

In PLR 201305006, the National Office ruled that a profit participation arrangement between a U.S. corporation and a wholly-owned foreign affiliate was a separate entity for Federal income tax purposes, and that the separate entity was a foreign business entity for U.S. tax purposes.  The profit participation agreement considered in the ruling was executed outside the United States, management committee meetings of the venture were held outside the United States, and the parties agreed to be governed exclusively by the laws of a foreign country.

New joint ventures or contractual arrangements (or other forms of collaboration between or among two or more parties) should consider whether they are separate entities for U.S. tax purposes, and if so, whether the separate entity should be organized as a U.S. entity or a foreign entity.  The latter issue may be important in light of current legislative efforts to limit corporate and partnership inversions.

The profit participation arrangement in PLR 201305006 elected to be treated as a corporation for U.S. income tax purposes, and the U.S. corporation that was one of the participants in the arrangement agreed to file Forms 5471 and 926.  The National Office specifically declined to rule on whether the arrangement could elect to be treated as a corporation for U.S. tax purposes.

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