International Tax Planning

Compliance reports decisions that have already been made. Planning makes them — and the window is almost always before a transaction closes, an entity is formed, or an asset moves.

The difference matters because most of the expensive positions in international tax are irreversible once filed. An entity classification election has a 60-month lock. An outbound transfer of intangibles under §367(d) creates a deemed sale with contingent payments commensurate with income for the life of the asset. A treaty position taken without limitation-on-benefits analysis is discovered at audit, not at filing.

Entity classification — the first decision

Check-the-box

Under Treasury Regulation §301.7701-3, an eligible entity — one not automatically classified as a corporation, including under the per-se foreign corporation list — may elect its US tax classification on Form 8832.

Defaults, absent an election:

Two mechanics that shape planning:

• The 75-day rule. An election’s effective date cannot be more than 75 days before the date the election is filed, nor more than 12 months after. Retroactivity is narrow, so the election is a calendar item at formation, not a cleanup item at filing.
• The 60-month limitation. Having elected, an entity generally cannot change classification again for 60 months, unless there has been a greater-than-50% ownership shift.

Classification drives everything downstream: whether the entity is a CFC, whether income is subpart F or net CFC tested income, whether losses are usable currently, whether a foreign tax is creditable, and which information return is due — Form 5471 for a foreign corporation, Form 8858 for a foreign disregarded entity or branch, Form 8865 for a foreign partnership.

Holding company structure and jurisdiction

Where a holding company sits determines withholding rates on dividends, interest and royalties, treaty access, and exposure to local anti-avoidance rules.

The analysis is not a search for the lowest rate. It is a search for a jurisdiction where the group can satisfy the limitation-on-benefits article of the relevant treaty — which, under Article 22 of the US Model, tests ownership, base erosion, publicly traded status and business activity. A holding company that cannot pass LOB gets no treaty benefit, and a structure built on the assumption that it can is worse than no structure at all, because it has costs and no benefit.

Substance requirements have tightened everywhere. A holding company with no people, no premises and no decision-making is now challenged routinely.

Repatriation planning

Getting cash back to the US parent involves choosing among dividends, intercompany loans, royalties, service fees and share redemptions — each with a different withholding profile, a different foreign tax credit consequence, and a different interaction with previously taxed earnings and profits.

Two things changed for tax years beginning after 31 December 2025:

• The deemed-paid credit under §960(d) rose from 80% to 90% of tested foreign income taxes, easing the haircut.
• A new 10% haircut applies to foreign taxes attributable to distributions of previously-taxed net CFC tested income, for distributions made on or after 28 June 2025.

The second one is the trap. It applies from a date earlier than the rest of the 2025 package and it affects distributions of income that was already taxed once.

Outbound transfers — IRC §367

When a US person transfers property to a foreign corporation, §367(a)(1) provides that the foreign corporation is not treated as a corporation for purposes of §§332, 351, 354, 356 and 361. Nonrecognition is switched off and gain is recognised.

The active trade or business exception was repealed by the 2017 Act for transfers after 31 December 2017. Any planning memo or web page that still describes it as available is out of date.

For intangibles, §367(d) treats the transfer as a deemed sale “in exchange for payments which are contingent upon the productivity, use, or disposition of such property,” with amounts commensurate with the income attributable to the intangible. The definition of intangible property at §367(d)(4) was broadened in 2017 to include goodwill, going concern value and workforce in place.

The practical consequence: a one-time arm’s-length price at transfer is not the end of it. §482 also directs the Secretary to require valuation of intangible transfers on an aggregate basis or on the basis of realistic alternatives where that is the most reliable means. An IP migration therefore needs documented projections and a defensible valuation, not a single point estimate — which is where planning, transfer pricing and valuation meet.

A transfer under §367 triggers a Form 926 filing, which carries a penalty of 10% of the fair market value of the transferred property, capped at $100,000 absent intentional disregard — and keeps the limitation period open until three years after the information is filed.

Planning after the 2025 changes

Three structures that worked through 2025 need re-modelling:

Anything built on the QBAI routine return. Former §951A(b) allowed a 10% return on qualified business asset investment to be subtracted before the GILTI inclusion. It was struck out in full. Groups that located tangible assets offshore partly for that shelter no longer have it.

Anything sitting just above the old break-even foreign rate. With the §960(d) credit rising from 80% to 90%, the foreign effective rate needed to fully offset US tax moves from roughly 13.125% to roughly 14%. Jurisdictions chosen against the old figure may no longer clear.

Anything relying on downward attribution — or on its absence. §958(b)(4) was restored, effective for taxable years of foreign corporations beginning after 31 December 2025, removing many accidental CFCs. New §951B creates a parallel regime for foreign controlled US shareholders. Groups that restructured in response to the 2017 repeal should check whether the restructuring is still needed.

Who we plan for

• US groups expanding abroad — entity choice, holding structure, IP location, and the compliance footprint each option creates.
• Foreign groups entering the US — inbound structuring, treaty and LOB positions, BEAT exposure, and Form 5472 obligations that begin with the first related-party transaction.
• Pass-through businesses — where entity classification interacts with owner-level tax and where the IC-DISC arbitrage is strongest.
• Businesses mid-transaction — where the planning window is measured in weeks and closes at signing.

Talk to us before the transaction closes

Contact our international tax team

Frequently asked questions

When should we do international tax planning?

Before the entity is formed, before the asset moves and before the transaction closes. Most of the significant positions are difficult or impossible to reverse: a classification election locks for 60 months, an outbound intangible transfer creates contingent payments for the life of the asset, and a treaty position taken without LOB analysis surfaces at audit.

How late can we file a check-the-box election?

An election’s effective date can be no more than 75 days before the date it is filed on Form 8832, and no more than 12 months after. There is no general retroactive relief beyond that window, so treat it as a formation deadline.

Can we change an entity’s classification later?

Generally not for 60 months after the effective date of a prior election, unless there has been a greater-than-50% shift in ownership.

Does the active trade or business exception still apply to outbound transfers?

No. The exception at former §367(a)(3) was repealed by the 2017 Act for transfers after 31 December 2017.

We restructured after 2017 because of downward attribution. Should we revisit it?

Probably. §958(b)(4) was restored for taxable years of foreign corporations beginning after 31 December 2025, which switches downward attribution from foreign persons back off and removes most accidental CFCs. New §951B picks up the fact pattern Congress actually intended to reach. Structures built purely to manage the 2017 repeal may no longer be necessary.

How does planning interact with transfer pricing?

Closely, and especially on intangibles. §367(d) and §482 both apply a commensurate-with-income standard, and §482 directs valuation on an aggregate or realistic-alternatives basis where that is most reliable. An IP location decision made without a defensible valuation and documented projections is a planning decision that fails at examination.

Sources

• Treas. Reg. §301.7701-3 (eCFR) — eligible entities, default classifications, the 75-day and 60-month rules
• IRS — About Form 8832
• 26 U.S.C. §367 — outbound transfers; §367(d) commensurate with income; §367(d)(4) intangible property definition
• 26 U.S.C. §482 — aggregate basis and realistic alternatives valuation
• 26 U.S.C. §960 — deemed-paid credit 90%, changed from 80% by P.L. 119-21 §70312(a)(1) for tax years beginning after 31 December 2025
• 26 U.S.C. §951A — QBAI net deemed tangible income return struck out
• 26 U.S.C. §958 — §958(b)(4) restored by P.L. 119-21 §70353(a)(1) · §951B
• United States Model Income Tax Convention, Article 22