Background On Per Se Corporations and Entity Classification Elections
A “Per Se” corporate entity is a type of domestic or foreign corporation that must remain a corporation and is ineligible to file Form 8832 (Entity Classification Election).
Under federal tax rules, certain default tax treatments apply when a legal entity is created. For example, when a U.S. limited liability company (LLC) is opened, and the entity has more than one LLC member, the LLC is, by default, treated as a partnership for federal tax purposes.
If an entity meets the definition of a domestic or foreign eligible entity, it may be able to file an entity classification election to change its tax classification.
The entity classification election is submitted using the IRS Form 8832.
Example Fact Pattern
John Smith and Jane Doe opened a U.S. LLC, each owning 50% of the LLC membership units. Because the LLC has more than one owner, it’s default tax treatment is a partnership for federal tax purposes. John and Jane want to change the tax classification.
John and Jane want to file Form 8832 to elect to treat the LLC as a corporation instead of a partnership. The U.S. LLC is a domestic eligible entity, so the LLC may file the entity classification election.
What is a Per Se Corporation and Why Does it Matter?
The U.S. tax code defines a corporation as any association, joint stock company, or insurance company.1 A foreign entity will be a “per se” corporation if the entity type and country are listed in the IRS Form 8832 Instructions and within the Treasury Regulations.2
Foreign entities can generally change their classification. However, if the entity is a “per se” corporation as listed in the regulations, it must remain a corporation and cannot file a change request to be either a disregarded entity or a partnership.
Example Scenario of Per Se Corporation
John Smith wants to open a non-U.S. entity to hold title to certain investments. John’s U.S. tax advisors educated him on the potential controlled foreign corporation (CFC) and passive foreign investment company (PFIC) issues of U.S. persons holding stock in foreign corporations.
As a result, John wants to use the foreign corporation for asset protection purposes, but he also wants to elect to treat the foreign corporation as a disregarded entity for federal tax purposes.
John’s advisors suggested using the Cayman Islands, Bermuda, or Luxembourg as a location for the legal entity. John reviews the “per se” corporation list and notes that a Limited Company (Ltd) could be used in Cayman or Bermuda because it is NOT on the list of per se corporations.
Therefore, he could file an entity classification election for those two entities. John sees that the Luxembourg Societe Anonyme entity is a “per se” corporation, so he declines to consider that entity type because he would not be allowed to file the Form 8832.