§ 301.7701–2 26 CFR Ch. I (4–1–01 Edition)
federal tax purposes is a matter of fed- 301.7701–4 unless a provision of the In- eral tax law and does not depend on ternal Revenue Code (such as section whether the organization is recognized 860A addressing Real Estate Mortgage as an entity under local law. Investment Conduits (REMICs)) pro- (2) Certain joint undertakings give rise vides for special treatment of that or- to entities for federal tax purposes. A ganization. For the classification of or- joint venture or other contractual ar- ganizations as trusts, see § 301.7701–4. rangement may create a separate enti- That section provides that trusts gen- ty for federal tax purposes if the par- erally do not have associates or an ob- ticipants carry on a trade, business, fi- jective to carry on business for profit. nancial operation, or venture and di- Sections 301.7701–2 and 301.7701–3 pro- vide the profits therefrom. For exam- vide rules for classifying organizations ple, a separate entity exists for federal that are not classified as trusts. tax purposes if co- owners of an apart- (c) Qualified cost sharing arrangements. ment building lease space and in addi- A qualified cost sharing arrangement tion provide services to the occupants that is described in § 1.482–7 of this either directly or through an agent. chapter and any arrangement that is Nevertheless, a joint undertaking treated by the Commissioner as a merely to share expenses does not cre- qualified cost sharing arrangement ate a separate entity for federal tax under § 1.482–7 of this chapter is not purposes. For example, if two or more recognized as a separate entity for pur- persons jointly construct a ditch mere- poses of the Internal Revenue Code. ly to drain surface water from their See § 1.482–7 of this chapter for the properties, they have not created a sep- proper treatment of qualified cost shar- arate entity for federal tax purposes. ing arrangements. Similarly, mere co-ownership of prop- (d) Domestic and foreign entities. For erty that is maintained, kept in repair, purposes of this section and §§ 301.7701– and rented or leased does not con- 2 and 301.7701–3, an entity is a domestic stitute a separate entity for federal tax entity if it is created or organized in purposes. For example, if an individual the United States or under the law of owner, or tenants in common, of farm the United States or of any State; an property lease it to a farmer for a cash entity is foreign if it is not domestic. rental or a share of the crops, they do See sections 7701(a)(4) and (a)(5). not necessarily create a separate enti- (e) State. For purposes of this section ty for federal tax purposes. and § 301.7701–2, the term State includes (3) Certain local law entities not recog- the District of Columbia. nized. An entity formed under local law (f) Effective date. The rules of this sec- is not always recognized as a separate tion are effective as of January 1, 1997. entity for federal tax purposes. For ex- [T.D. 8697, 61 FR 66588, Dec. 18, 1996] ample, an organization wholly owned by a State is not recognized as a sepa- § 301.7701–2 Business entities; defini- rate entity for federal tax purposes if it tions. is an integral part of the State. Simi- (a) Business entities. For purposes of larly, tribes incorporated under section this section and § 301.7701–3, a business 17 of the Indian Reorganization Act of entity is any entity recognized for fed- 1934, as amended, 25 U.S.C. 477, or under eral tax purposes (including an entity section 3 of the Oklahoma Indian Wel- with a single owner that may be dis- fare Act, as amended, 25 U.S.C. 503, are regarded as an entity separate from its not recognized as separate entities for owner under § 301.7701–3) that is not federal tax purposes. properly classified as a trust under (4) Single owner organizations. Under § 301.7701–4 or otherwise subject to spe- §§ 301.7701–2 and 301.7701–3, certain orga- cial treatment under the Internal Rev- nizations that have a single owner can enue Code. A business entity with two choose to be recognized or disregarded or more members is classified for fed- as entities separate from their owners. eral tax purposes as either a corpora- (b) Classification of organizations. The tion or a partnership. A business entity classification of organizations that are with only one owner is classified as a recognized as separate entities is deter- corporation or is disregarded; if the en- mined under §§ 301.7701–2, 301.7701–3, and tity is disregarded, its activities are
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treated in the same manner as a sole Finland, Julkinen Osakeyhtio/Publikt proprietorship, branch, or division of Aktiebolag the owner. France, Societe Anonyme (b) Corporations. For federal tax pur- Germany, Aktiengesellschaft Greece, Anonymos Etairia poses, the term corporation means— Guam, Corporation (1) A business entity organized under Guatemala, Sociedad Anonima a Federal or State statute, or under a Guyana, Public Limited Company statute of a federally recognized Indian Honduras, Sociedad Anonima tribe, if the statute describes or refers Hong Kong, Public Limited Company to the entity as incorporated or as a Hungary, Reszvenytarsasag corporation, body corporate, or body Iceland, Hlutafelag politic; India, Public Limited Company (2) An association (as determined Indonesia, Perseroan Terbuka Ireland, Public Limited Company under § 301.7701–3); Israel, Public Limited Company (3) A business entity organized under Italy, Societa per Azioni a State statute, if the statute describes Jamaica, Public Limited Company or refers to the entity as a joint-stock Japan, Kabushiki Kaisha company or joint-stock association; Kazakstan, Ashyk Aktsionerlik Kogham (4) An insurance company; Republic of Korea, Chusik Hoesa (5) A State-chartered business entity Liberia, Corporation conducting banking activities, if any of Luxembourg, Societe Anonyme Malaysia, Berhad its deposits are insured under the Fed- Malta, Public Limited Company eral Deposit Insurance Act, as amend- Mexico, Sociedad Anonima ed, 12 U.S.C. 1811 et seq., or a similar Morocco, Societe Anonyme federal statute; Netherlands, Naamloze Vennootschap (6) A business entity wholly owned by New Zealand, Limited Company a State or any political subdivision Nicaragua, Compania Anonima thereof; Nigeria, Public Limited Company (7) A business entity that is taxable Northern Mariana Islands, Corporation as a corporation under a provision of Norway, Allment Aksjeselskap Pakistan, Public Limited Company the Internal Revenue Code other than Panama, Sociedad Anonima section 7701(a)(3); and Paraguay, Sociedad Anonima (8) Certain foreign entities—(i) In gen- Peru, Sociedad Anonima eral. Except as provided in paragraphs Philippines, Stock Corporation (b)(8)(ii) and (d) of this section, the fol- Poland, Spolka Akcyjna lowing business entities formed in the Portugal, Sociedade Anonima following jurisdictions: Puerto Rico, Corporation Romania, Societe pe Actiuni American Samoa, Corporation Russia, Otkrytoye Aktsionernoy Argentina, Sociedad Anonima Obshchestvo Australia, Public Limited Company Saudi Arabia, Sharikat Al-Mossahamah Austria, Aktiengesellschaft Singapore, Public Limited Company Barbados, Limited Company Slovak Republic, Akciova Spolocnost Belgium, Societe Anonyme South Africa, Public Limited Company Belize, Public Limited Company Spain, Sociedad Anonima Bolivia, Sociedad Anonima Surinam, Naamloze Vennootschap Brazil, Sociedade Anonima Sweden, Publika Aktiebolag Canada, Corporation and Company Switzerland, Aktiengesellschaft Chile, Sociedad Anonima Thailand, Borisat Chamkad (Mahachon) People’s Republic of China, Gufen Youxian Trinidad and Tobago, Limited Company Gongsi Tunisia, Societe Anonyme Republic of China (Taiwan), Ku-fen Yu-hsien Turkey, Anonim Sirket Kung-szu Ukraine, Aktsionerne Tovaristvo Vidkritogo Colombia, Sociedad Anonima Tipu Costa Rica, Sociedad Anonima United Kingdom, Public Limited Company Cyprus, Public Limited Company United States Virgin Islands, Corporation Czech Republic, Akciova Spolecnost Uruguay, Sociedad Anonima Denmark, Aktieselskab Venezuela, Sociedad Anonima or Compania Ecuador, Sociedad Anonima or Compania Anonima Anonima Egypt, Sharikat Al-Mossahamah (ii) Clarification of list of corporations El Salvador, Sociedad Anonima in paragraph (b)(8)(i) of this section—(A)
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Exceptions in certain cases. The fol- treated in the same manner as an Akti- lowing entities will not be treated as engesellschaft. corporations under paragraph (b)(8)(i) (c) Other business entities. For federal of this section: tax purposes— (1) With regard to Canada, a Nova (1) The term partnership means a Scotia Unlimited Liability Company business entity that is not a corpora- (or any other company or corporation tion under paragraph (b) of this section all of whose owners have unlimited li- and that has at least two members. ability pursuant to federal or provin- (2) Wholly owned entities—(i) In gen- cial law). eral. A business entity that has a single (2) With regard to India, a company owner and is not a corporation under deemed to be a public limited company paragraph (b) of this section is dis- solely by operation of section 43A(1) regarded as an entity separate from its (relating to corporate ownership of the owner. company), section 43A(1A) (relating to (ii) Special rule for certain business en- annual average turnover), or section tities. If the single owner of a business 43A(1B) (relating to ownership inter- entity is a bank (as defined in section ests in other companies) of the Compa- 581), then the special rules applicable nies Act, 1956 (or any combination of to banks will continue to apply to the these), provided that the organiza- single owner as if the wholly owned en- tional documents of such deemed pub- tity were a separate entity. lic limited company continue to meet (d) Special rule for certain foreign busi- the requirements of section 3(1)(iii) of ness entities—(1) In general. Except as the Companies Act, 1956. provided in paragraph (d)(3) of this sec- (3) With regard to Malaysia, a tion, a foreign business entity de- Sendirian Berhad. scribed in paragraph (b)(8)(i) of this (B) Inclusions in certain cases. With re- section will not be treated as a cor- gard to Mexico, the term Sociedad poration under paragraph (b)(8)(i) of Anonima includes a Sociedad Anonima this section if— that chooses to apply the variable cap- (i) The entity was in existence on ital provision of Mexican corporate law May 8, 1996; (Sociedad Anonima de Capital Vari- (ii) The entity’s classification was able). relevant (as defined in § 301.7701–3(d)) on (iii) Public companies. For purposes of May 8, 1996; paragraph (b)(8)(i) of this section, with (iii) No person (including the entity) regard to Cyprus, Hong Kong, and Ja- for whom the entity’s classification maica, the term Public Limited Com- was relevant on May 8, 1996, treats the pany includes any Limited Company entity as a corporation for purposes of that is not defined as a private com- filing such person’s federal income tax pany under the corporate laws of those returns, information returns, and with- jurisdictions. In all other cases, where holding documents for the taxable year the term Public Limited Company is including May 8, 1996; not defined, that term shall include (iv) Any change in the entity’s any Limited Company defined as a pub- claimed classification within the sixty lic company under the corporate laws months prior to May 8, 1996, occurred of the relevant jurisdiction. solely as a result of a change in the or- (iv) Limited companies. For purposes ganizational documents of the entity, of this paragraph (b)(8), any reference and the entity and all members of the to a Limited Company includes, as the entity recognized the federal tax con- case may be, companies limited by sequences of any change in the entity’s shares and companies limited by guar- classification within the sixty months antee. prior to May 8, 1996; (v) Multilingual countries. Different (v) A reasonable basis (within the linguistic renderings of the name of an meaning of section 6662) existed on entity listed in paragraph (b)(8)(i) of May 8, 1996, for treating the entity as this section shall be disregarded. For other than a corporation; and example, an entity formed under the (vi) Neither the entity nor any mem- laws of Switzerland as a Societe ber was notified in writing on or before Anonyme will be a corporation and May 8, 1996, that the classification of
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the entity was under examination (in entity as a result of paragraph (b)(8)(i) which case the entity’s classification of this section in effect on November will be determined in the examina- 29, 1999 may elect by February 14, 2000 tion). to be classified for federal tax purposes (2) Binding contract rule. If a foreign as an entity other than a corporation business entity described in paragraph retroactive to any period from and in- (b)(8)(i) of this section is formed after cluding January 1, 1997. Any Finnish May 8, 1996, pursuant to a written bind- entity that becomes an eligible entity ing contract (including an accepted bid as a result of paragraph (b)(8)(i) of this to develop a project) in effect on May 8, section in effect on November 29, 1999 1996, and all times thereafter, in which may elect by February 14, 2000 to be the parties agreed to engage (directly classified for federal tax purposes as an or indirectly) in an active and substan- entity other than a corporation retro- tial business operation in the jurisdic- tion in which the entity is formed, active to any period from and including paragraph (d)(1) of this section will be September 1, 1997. applied to that entity by substituting [T.D. 8697, 61 FR 66589, Dec. 18, 1996, as the date of the entity’s formation for amended by T.D. 8844, 64 FR 66583, Nov. 29, May 8, 1996. 1999] (3) Termination of grandfather status— (i) In general. An entity that is not § 301.7701–3 Classification of certain treated as a corporation under para- business entities. graph (b)(8)(i) of this section by reason (a) In general. A business entity that of paragraph (d)(1) or (d)(2) of this sec- is not classified as a corporation under tion will be treated permanently as a § 301.7701–2(b) (1), (3), (4), (5), (6), (7), or corporation under paragraph (b)(8)(i) of (8) (an eligible entity) can elect its clas- this section from the earliest of: sification for federal tax purposes as (A) The effective date of an election provided in this section. An eligible en- to be treated as an association under tity with at least two members can § 301.7701–3; elect to be classified as either an asso- (B) A termination of the partnership under section 708(b)(1)(B) (regarding ciation (and thus a corporation under sale or exchange of 50 percent or more § 301.7701–2(b)(2)) or a partnership, and of the total interest in an entity’s cap- an eligible entity with a single owner ital or profits within a twelve month can elect to be classified as an associa- period); or tion or to be disregarded as an entity (C) A division of the partnership separate from its owner. Paragraph (b) under section 708(b)(2)(B). of this section provides a default clas- (ii) Special rule for certain entities. For sification for an eligible entity that purposes of paragraph (d)(2) of this sec- does not make an election. Thus, elec- tion, paragraph (d)(3)(i)(B) of this sec- tions are necessary only when an eligi- tion shall not apply if the sale or ex- ble entity chooses to be classified ini- change of interests in the entity is to a tially as other than the default classi- related person (within the meaning of fication or when an eligible entity sections 267(b) and 707(b)) and occurs no chooses to change its classification. An later than twelve months after the entity whose classification is deter- date of the formation of the entity. mined under the default classification (e) Effective date. Except as otherwise retains that classification (regardless provided in this paragraph (e), the of any changes in the members’ liabil- rules of this section apply as of Janu- ity that occurs at any time during the ary 1, 1997. The reference to the Finn- time that the entity’s classification is ish, Maltese, and Norwegian entities in relevant as defined in paragraph (d) of paragraph (b)(8)(i) of this section is ap- this section) until the entity makes an plicable on November 29, 1999. The ref- erence to the Trinidadian entity in election to change that classification paragraph (b)(8)(i) of this section ap- under paragraph (c)(1) of this section. plies to entities formed on or after No- Paragraph (c) of this section provides vember 29, 1999. Any Maltese or Nor- rules for making express elections. wegian entity that becomes an eligible Paragraph (d) of this section provides
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