2025-12-17
Clients setting up foreign entities typically have a choice of classifying the entity as a corporation or a flow-thru entity (a disregarded entity or a partnership) for US tax purposes.
To determine which classification is preferred, an effective tax rate analysis can be performed under both situations. The effective tax rate analysis includes many variables and can be quite complicated.
We have created two web pages that show sample effective tax rate (“ETR”) calculations for corporate classification and flow-thru classification for selected countries. We also created an Excel file that mimics the calculations. The Excel file can be downloaded here. All of these resources should be used with caution. See the disclaimers.
The corporate ETR analysis includes Scenarios 1 and 2. Scenario 1 computes the effective tax rate without the making of a Code §962 election. Scenario 2 computes the effective tax rate with the making of a Code §962 election.
(Code §962 elections are only made if there is a GILTI or Subpart F income inclusion. If the high-tax exception election is available, the high-tax election would normally be made to avoid the inclusion. Therefore, the analysis in Scenario 2 is typically relevant only if no high-tax exception election can be made.)
The flow-thru ETR analysis includes Scenario 3.
Commentary is included on many aspects of the decision-making process. See the yellow buttons. To view all commentary for each page, click the “View All Topics” yellow button. We also discussed many of these factors in our prior blog post: Musings on Structure Planning For Closely-Held Foreign Entities.
Let us know if you find any mistakes in the calculations or the analysis.