U.S. tax planners often refer to “hybrid entities” and “reverse hybrid entities.” This blog entry briefly discusses the meaning of these terms.
From a U.S. tax perspective, a hybrid entity is an entity that is “fiscally transparent” for U.S. tax purposes but not fiscally transparent for foreign tax purposes. In general, an entity is fiscally transparent if the entity’s current year profits are currently taxable to the owners of the entity, regardless of whether the entity made any distributions to its owners during that year. (See Treas. Reg. § 1.894-1(d)(3)(ii) and (iii) for a more extensive definition.)
Partnerships are typically fiscally transparent entities. Corporations are typically not fiscally transparent entities. Limited liability companies and various types of foreign entities may or may not be fiscally transparent.
A reverse hybrid entity is the “reverse” of a hybrid entity in that the entity is fiscally transparent for foreign tax purposes but not fiscally transparent for U.S. tax purposes. Entities that are treated the same for U.S. and foreign tax purposes are not “hybrid” entities.
Shown below is a flowchart/decision tree that helps determine whether an entity is a hybrid entity or a reverse hybrid entity. The flowchart also indicates some of the special U.S. tax rules that may apply to domestic and foreign, hybrid and reverse hybrid entities.
Click here for a full size version of the chart.