Tax treaty exempts a foreign corporation's branch profits tax on the dividend equivalent amount from its U.S. LLCs

Plain-English summary

When a foreign corporation runs a U.S. branch, the U.S. charges a "branch profits tax" (Section 884) on top of the regular corporate income tax. The idea is to mimic the tax that would apply if a U.S. subsidiary paid a dividend to its foreign parent, so the tax falls on the "dividend equivalent amount" (roughly, the branch's effectively connected earnings after adjusting for changes in U.S. net equity). Many U.S. income tax treaties limit or eliminate this branch profits tax. Here a Country A corporation, whose publicly traded parent qualifies for treaty benefits, plans to restructure so it holds its U.S. operations through disregarded LLCs and a registered U.S. branch. It asked whether the treaty blocks the branch profits tax on the dividend equivalent amount tied to those LLCs. The IRS ruled yes: the taxpayer qualifies for the treaty's exemption (Article 11(3)(b)) because it is a subsidiary of a publicly traded company, and the treaty's fiscally-transparent-entity rule (Article 24(4)) does not cut off benefits, because the dividend equivalent amount is a notional figure computed at the foreign corporation's level, not income "derived through" the LLCs. So no branch profits tax applies to that amount.

Ruling snapshot

• Question: Does the U.S.-Country A treaty prevent branch profits tax under § 884 on the taxpayer's dividend equivalent amount attributable to its wholly owned U.S. LLCs?
• Outcome: Approved (no branch profits tax imposed on that dividend equivalent amount).
• Key authorities: IRC § 884 (with §§ 882 and 11); U.S.-Country A Treaty Articles 7, 11, 24(4), and 26; Treas. Reg. § 1.884-1(d)(3).

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202607002 [Third Party Communication:
Release Date: 2/13/2026 Date of Communication: Month DD, YYYY]
Index Number: 884.01-00, 884.02-00,
884.06-00, 894.14-00 Person To Contact:
[Redacted], ID No. [Redacted]
[Redacted] Telephone Number:
[Redacted] [Redacted]
Refer Reply To:
CC:INTL:B01
PLR-109500-25
Date:
August 21, 2025

TY:

LEGEND

Parent = [Redacted]
Taxpayer = [Redacted]
HoldCo = [Redacted]
HoldLLC = [Redacted]
U.S. LLCs = [Redacted]
Country A = [Redacted]
State Q = [Redacted]
stock exchange X = [Redacted]
stock exchange Y = [Redacted]
U.S.-Country A Treaty = [Redacted]
Year 1 = [Redacted]

Dear [Redacted]:

This replies to your letter dated May 5, 2025, from your authorized representative, in
which you request a ruling providing that, pursuant to the United States-Country A
Treaty (the "Treaty"), no branch profits tax will be imposed under section 884 of the
Code1 on the dividend equivalent amount of Taxpayer with respect to its U.S. net equity
attributable to its wholly owned limited liability companies.

The ruling contained in this letter is based upon facts and representations submitted by
Taxpayer and accompanied by a penalty of perjury statement executed by an
appropriate party. This office has not verified any of the material submitted in support of
the request for a ruling. Verification of the factual information, representations, and other
data may be required as part of the audit process.

Parent, a Country A entity, is classified as a corporation for federal income tax
purposes. The ordinary shares of Parent are listed on stock exchanges X and Y. Parent
is a qualified person under Article 26(2)(c)(i) of the U.S.-Country A Treaty. Parent wholly
owns Taxpayer, a Country A entity that is classified as a corporation for federal income
tax purposes and is a calendar-year taxpayer. Taxpayer is a qualified person under
Article 26(2)(c)(ii) of the U.S.-Country A Treaty. Taxpayer conducts limited transactions
in the United States, which it reports as attributable to a permanent establishment in the
United States. Taxpayer wholly owns HoldCo, a State Q corporation. HoldCo owns
multiple State Q limited liability companies that are disregarded as separate from
HoldCo for federal income tax purposes. In Year 1, the assets of those limited liability
companies represented 99% of the net book value of the assets of HoldCo and its
subsidiaries. HoldCo also owns a dormant foreign corporation and multiple domestic
corporations, several of which it anticipates dissolving as part of the proposed
restructuring described below. In Year 1, the assets of those corporations represented
less than 1% of the net book value of HoldCo and its subsidiaries.

For business purposes, Taxpayer intends to restructure in order to conduct most of its
U.S. operations directly through a registered U.S. branch. As part of this proposed
restructuring, HoldCo will convert to HoldLLC, a State Q limited liability company, in a
transaction treated as a distribution in complete liquidation of HoldCo under section 332
of the Code. Taxpayer expects that the transaction will qualify for nonrecognition
treatment under Treas. Reg. § 1.367(e)-2(b)(2)(i) and intends to attach the required
statement described in Treas. Reg. § 1.367(e)-2(b)(2)(i)(C) to its applicable income tax
return(s). After the conversion, HoldLLC would be classified as a corporation for
Country A purposes and would be disregarded as separate from Taxpayer for federal
income tax purposes. The State Q limited liability companies owned by HoldLLC would
also be disregarded as separate from Taxpayer for federal income tax purposes. After
the proposed restructuring, Taxpayer intends to move substantial portions of its existing
U.S. operations to its newly registered U.S. branch. Taxpayer would also continue to
conduct certain operations through HoldLLC and some of its wholly owned State Q
limited liability companies (collectively, the "U.S. LLCs").

1 Sections referenced are to the Internal Revenue Code of 1986, as amended (the "Code"), unless
otherwise specified.

Taxpayer will report the business profits earned by its registered U.S. branch and the
U.S. LLCs as income effectively connected with the conduct of a U.S. trade or business
on its U.S. income tax return. Taxpayer expects such business profits to be attributable
to a permanent establishment in the United States under the U.S.-Country A Treaty.
Taxpayer expects that any distributions from HoldLLC to Taxpayer will be treated as
dividends received with respect to qualified shareholdings in a non-resident corporation,
and thus generally exempt from corporate income tax under Country A law.

LAW

Section 882 provides that a foreign corporation engaged in a trade or business within
the United States during a taxable year is taxable under section 11 (or section 59A) on
its taxable income which is effectively connected with the conduct of a trade or business
within the United States.

Section 884(a) imposes on a foreign corporation an additional tax of 30 percent on its
dividend equivalent amount ("DEA") for the taxable year. Section 884(b) defines a DEA
as a foreign corporation's effectively connected earnings and profits ("ECEP") for the
taxable year, reduced by certain increases in U.S. net equity and increased by certain
reductions in U.S. net equity. Section 884(c) generally defines U.S. net equity as U.S.
assets reduced by U.S. liabilities. Section 884(d)(1) defines ECEP as earnings and
profits that are attributable to income which is effectively connected (or treated as
effectively connected) with the conduct of a trade or business within the United States,
subject to certain exceptions in section 884(d)(2). Section 884(e) provides rules on the
coordination of the branch profits tax with income tax treaties.

Article 7(1) of the U.S.-Country A Treaty states that the profits of an enterprise of one of
the States shall be taxable only in that State unless the enterprise carries on business in
the other State through a permanent establishment situated therein. If the enterprise
carries on business as aforesaid, the profits of the enterprise may be taxed in the other
State but only so much of them as is attributable to that permanent establishment.

Article 11(1) of the U.S.-Country A Treaty provides as follows:

   A corporation which is a resident of one of the States and which has a
   permanent establishment in the other State or which is subject to tax on a
   net basis in that other State under Article 6 (Income from Real Property) or
   under paragraph 1 of Article 14 (Capital Gains), may be subject in that
   other State to a tax in addition to the tax allowable under the other
   provisions of this Convention. Such tax, however, may be imposed only on
   that portion of the business profits of the corporation attributable to the
   permanent establishment under this Convention or the income subject to
   tax on a net basis under Article 6 (Income from Real Property) or under
   paragraph 1 of Article 14 (Capital Gains) and reduced for all taxes
   chargeable in that State on such profits and income, other than the
   additional tax referred to herein, and further reduced (but not below zero)
   for any increase in the net equity attributable to such permanent
   establishment at the end of the taxation year, as measured from the end
   of the preceding taxation year, and increased (but not in excess of the
   accumulated profits) for any decrease in the net equity attributable to such
   permanent establishment at the end of the taxation year, as measured
   from the end of the preceding taxation year.

Article 11(3) of the U.S.-Country A Treaty provides further:

   The tax referred to in paragraph 1 shall not be imposed at a rate
   exceeding the rate specified in paragraph 2(a) of Article 10 (Dividends).
   Paragraph 1 shall not apply in the case of a company that:

   a) prior to October 1st, 1998 was engaged in activities giving rise to profits
   attributable to that permanent establishment or to income or gains to
   which the provisions of Article 6 or, as the case may be, paragraph 1 of
   Article 14 apply;

   b) is a qualified person by reason of subparagraph c) of paragraph 2 of
   Article 26 (Limitation on Benefits) of this Convention; or

   c) is entitled to benefits with respect to the dividends under paragraph 3 of
   Article 26; or

   d) has received a determination pursuant to paragraph 7 of Article 26 with
   respect to this paragraph.

Article 11(4) of the U.S.-Country A Treaty states that in the case of the United States,
the additional tax described in paragraph 1 may be imposed on the "dividend equivalent
amount" as defined under U.S. law.

Article 24(4) of the U.S.-Country A Treaty provides as follows:

   In the case of an item of income, profit or gain derived through a person
   that is fiscally transparent under the laws of either State, such item shall
   be considered to be derived by a resident of a State to the extent that the
   item is treated for the purposes of the taxation law of such State as the
   income, profit or gain of a resident.

Article 26(1) of the U.S.-Country A Treaty provides that, subject to certain exceptions, a
resident of one of the States that derives income from the other State shall be entitled to
treaty benefits only if such resident is a "qualified person" and satisfies any other
specified conditions for obtaining such benefits.

ANALYSIS

As a foreign corporation that earns income effectively connected with the conduct of a
U.S. trade or business during a taxable year, through both its registered U.S. branch
and the U.S. LLCs, Taxpayer is subject to tax on such income under section 11.
Taxpayer is also subject to the branch profits tax under section 884(a) on its DEA for
the taxable year.

Because Taxpayer earns business profits attributable to a permanent establishment in
the United States, the profits are taxable in the United States under Article 7(1) of the
Treaty. Further, as a corporate resident of Country A with a permanent establishment in
the United States, Taxpayer is also subject to branch profits tax in the United States
under Article 11(1) of the Treaty. This tax may be imposed only on the portion of
business profits attributable to Taxpayer's permanent establishment that comprise the
DEA under domestic law. Article 11(3) provides an exemption from the branch profits
tax if a corporate resident meets any of four conditions. Here, Taxpayer satisfies the
condition in Article 11(3)(b) because it is a subsidiary of a publicly traded company, and
thus a qualified person described in Article 26(2)(c).

While Article 24(4) of the Treaty conditions entitlement to treaty benefits with respect to
income, profits or gain earned through a fiscally transparent entity on the treatment of
the income in the other Contracting State, it does not apply here with respect to
Taxpayer's DEA because it is not "derived through" the U.S. LLCs. The DEA is
computed by reference to a foreign corporation's ECEP for a taxable year, and the net
increase or decrease in the foreign corporation's U.S. net equity (generally, its U.S.
assets reduced by U.S. liabilities). It is conceptually a notional amount in respect of
items of, and computed at the level of, the foreign corporation owning the fiscally
transparent entity with respect to all of its branch operations.2 While the DEA is based
upon a net remittance from the earnings of a foreign corporation's U.S. branch
operations, it does not necessarily involve an amount paid or accrued from the U.S.
branch operations. Further, the purpose of the DEA as an analogue to a dividend paid
directly to the foreign corporation from the combined earnings of the fiscally transparent
entity and any other U.S. branches of the foreign corporation supports the conclusion
that it is not derived through (or by) a fiscally transparent entity (cf. section
884(e)(2)(A)(ii)). Accordingly, Article 24(4) of the Treaty does not restrict Taxpayer's
entitlement to treaty benefits on its DEA, including any amount that relates to business
profits earned by the U.S. LLCs.

2 For example, in computing its increase or decrease in U.S. net equity, a foreign corporation that is a
partner in a partnership takes into account its partnership interest, and not the partnership's assets, in
determining its U.S. assets. See Treas. Reg. § 1.884-1(d)(3). Thus, the DEA (in contrast to any related
business profits earned through the partnership) would not be determined at the level of the partnership
and would not be an item of income of the partnership.

CONCLUSION

Based on the above facts and representations, pursuant to the U.S.-Country A Treaty,
no branch profits tax will be imposed under section 884 on the dividend equivalent
amount of Taxpayer with respect to its U.S. net equity attributable to its wholly owned
limited liability companies.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter under other provisions of the Code and regulations, or about the tax treatment
of any conditions existing at the time of, or effects resulting from, the transactions not
specifically covered by the above ruling.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

A copy of this letter must be attached to any income tax return to which it is relevant.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                               Sincerely,

                                               Associate Chief Counsel
                                               (International)

                                               By: /s/     Subin Seth
                                               Subin Seth
                                               Senior Counsel, Branch 1
                                               Office of the Associate Chief Counsel
                                               (International)

Enclosure
Copy for § 6110 purposes.

cc: [Redacted]

cc: [Redacted]

cc: [Redacted]