Obama Administration Drops "Check-the-Box" Entity Classification Proposal For Foreign Subsidiaries

Last year, President Obama's budget included a proposal to change the tax treatment of many foreign businesses that are owned by U.S. companies by undoing the application of the Clinton Administration "check-the-box" (CTB) regulations as they apply to wholly-owned foreign corporate subsidiaries that "check-the-box" to be treated as disregarded entities for U.S. tax purposes. Ostensibly, the Administration was concerned about the use of "disregarded entities" to defer foreign income in a manner viewed as inappropriate by the Administration.

This proposal generated significant concern for the REIT industry, particularly because REITs invest in foreign disregarded entities both to maintain compliance with the REIT rules (forbidding more than 10% ownership in most corporations) and to allow for current pass-through to shareholders of foreign earned income. On Dec. 23, 2009, NAREIT submitted comments to the Treasury Department explaining these concerns in greater detail. Further, on Jan. 11, 2010, NAREIT met with the Joint Committee on Taxation to explain why the CTB proposal should not apply to REITs. NAREIT also was a member of a coalition of businesses that argued that the CTB proposal should only be considered in the context of larger international tax reform proposals.

We are pleased to report that the Obama Administration's Fiscal Year 2011 budget, released today, no longer contains a proposal to change the CTB rules. For the Treasury Department's Explanation of the Administration's Fiscal Year 2011 Revenue Proposals (Green Book), click here.