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Update on U.S. classification of U.K. LLCs.

For U.S.-based multinational businesses, a key tax planning technique is the use of hybrid entities for foreign joint ventures. Generally, the goal is to structure the foreign entity so that it is classified as a corporation under foreign law and a partnership under U.S. law.

Foreign limited liability companies (LLCs) are popular for joint ventures, since they provide liability protection and the applicable foreign statutes usually permit restrictions on free transferability of interests and continuity of life. Under Regs. Sec. 301.7701-2, an unincorporated business entity that lacks the two corporate characteristics of free transferability of interests and continuity of life will be classified as a partnership for U.S. tax purposes.

Rev. Rul. 93-4 held that a German GmbH lacked continuity of life because its memorandum of association required dissolution on the bankruptcy of either "shareholder" (called quotaholders) "without further action." (Emphasis added.) (See the Tax Clinic item, "Update on U.S. Classification of German Entity," TTA, May 1993, at 315.)

Regs. Sec. 301.7701-2(b)(1) states that

. . . continuity of life does not exist notwithstanding the fact that a dissolution of the limited partnership may be avoided, upon such an event of withdrawal of a general partner, by the remaining general partners agreeing to continue the partnership or by at least a majority in interest of the remaining partners agreeing to continue the partnership.... Thus, the regulations appear not to take the concept of "further action" into account, by stating that there is no continuity of life

even though "further action" is voluntarily taken to avoid dissolution. on the other hand, Rev. Rul. 93-4 took this concept into account in determining that continuity of life did not exist if a dissolution event caused an entity to dissolve "without further action." The IRS is currently reconsidering the issue of whether a U.K. LLC can lack the corporate characteristic of continuity of life in light of Rev. Rul. 93-4. Specifically, can a U.K. LLC dissolve "without further action"? Of particular concern is the fact that U.K. corporate law does not allow a company to provide in its articles for its automatic dissolution on the occurrence of a dissolution event. Rather, there is a two-step process. First, a dissolution event (such as bankruptcy) must occur. Second, the company, in a general meeting, must pass a resolution requiring it to be wound up voluntarily. Looking solely at that law, a U.K. LLC should possess the corporate characteristic of continuity of life since its dissolution requires "further action." The key phrase in Rev. Rul. 934 is "without further action." In the U.K. situation, the question is whether a dissolution event is merely an opportunity to dissolve. If so, it is similar to a corporation that dissolves by shareholder vote. In such a situation, the Service will treat the entity as having continuity of life. rom Richard A. Blum, CPA, New York, N.Y.
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Title Annotation:limited liability companies
Author:Blum, Richard A.
Publication:The Tax Adviser
Date:May 1, 1994
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