An eligible entity (i.e., an entity that is not on the list of entities prohibited from electing their status) may affirmatively elect its classification by filing Form 8832 with the IRS. iN Mexico the only type of corporation that can make this election is know as a Socidada Limitada (SRL de CV) This election effectively overrides the entity’s default classification as a corporation for US tax purposes only. It does not effect the classification as a corporation in Mexico. The election is commonly referred to as a “check the box” election, because you put a check in the box on the form next to the entity classification you have chosen for your company.
It’s important to note that the election, if not made to correspond with the company’s incorporation or creation date, can trigger U.S. tax implications. A tax advisor should be consulted if you are considering tax planning that involves a check the box election.
A foreign entity that is required to file a federal tax or information return for the taxable year for which an election is made (e.g., the company has taxable activities within the U.S.) must attach a copy of the Form 8832 to its return. If the entity is not required to file, a copy of the Form 8832 generally must be attached to the return of an owner of the entity. The failure to comply with these filing rules does not invalidate the election, but may trigger penalties.
The advantage of this election for US tax purposes is:
- All of the corporations net income flows through to the US owners and is taxed on their personal return.
- If the corporation pays Mexican income taxes the US owners can claim those taxes as a tax credit on their US return.
- It avoids double taxation of the gain on the sale of any assets of the corporation.
- Will avoid the Mexican corporation from become a personal holding company.
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