Your joint venture may not be a separate business entity, but will be considered as one for federal tax purposes.
In February 2013, the Internal Revenue Service (IRS) issued Private Letter Ruling (PLR) 201305006 in response to a petition filed by a taxpayer, requesting clarification on the classification of a joint venture as a separate entity based on his situation and business setup for federal tax purposes.
AG Tax professionals have prepared a brief summary of this PLR and related regulations, which may be useful to taxpayers who are considering a joint venture business.
PLR Briefin
PLR 201305006 provides a guideline as to whether or not the IRS would recognize a wholly-owned foreign affiliate of a US company (a contractual joint venture) as a separate entity for federal tax purposes, even if it is not recognized as such at the local tax level.
Contractual Joint Venture
A contractual joint venture is an arrangement in which two parties sign a contract detailing the terms required in order to run the business together (e.g. profit-sharing, contributions, management responsibilities etc). The parties do not set up a separate legal entity for the project, but work together in partnership, sharing the profits or losses of the venture.
IRS Response
The IRS responded by referring to Regulations section 201.7701-1(a), which states that a joint venture, or other contractual arrangement, may create a separate entity if the participants carry on a trade or business and divide the profits from it. The determination of this is not based on whether the organization is recognized as an entity under local law, but solely on federal tax laws.
Based on the PLR guideline, if a US company enters into a joint venture agreement with its wholly-owned foreign affiliate to engage in business in the foreign region and they share the profits and losses as well as the management responsibilities, the US company may treat this foreign contractual joint venture partner as a segregated entity for US federal tax purposes. This is according to entity classification regulations under IRC section 7701 .
Case-by-case
It should to be noted that this PLR is based on an individual taxpayer’s request relating to a U.S. outbound transaction and should only be relied on for guidance in understanding the IRS’s dealing with joint ventures and separate entity status for federal tax purposes. Please note that PLRs may vary on a case-by–case basis, so it is crucial that a taxpayer consults with an international tax advisor before becoming involved in in any foreign business arrangements or filing similar PRL petitions.
AG Tax LLP Can Help
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- State Sales Tax & E-commerce Taxation
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:
- 416-238-5920 (Greater Toronto Area, ON)
- 604-538-8735 (Greater Vancouver Area, BC)
- 780-702-2732 (Greater Edmonton Area, AB)
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.
