Q:  Who is eligible to claim the ETI exclusion?

A:  All U.S. taxpayers and investors or members in pass-through entities are eligible to exclude income from qualified transactions.  Thus, individuals, partners in U.S. partnerships, shareholders in S corporations, as well as U.S. C corporations and even electing foreign corporations can qualify as an eligible taxpayer.  Income earned by foreign corporations that are treated as a branch under the check-the-box rules also can be excluded under the ETI regime, but foreign tax credits may be lost.

The main criterion for being an eligible taxpayer is that the person or company claiming the ETI exclusion must pay tax in the United States.  Thus, in order for a foreign corporation to claim the ETI exclusion, it must first elect to be taxed as a domestic corporation under Sec. 943(e) of the Code.  A foreign electing-corporation is treated as a U.S. corporation for purposes of filing a consolidated return (Secs. 1502-1504 of the Code).  In addition, dividends received by a U.S. C corporation from a foreign electing-corporation would be eligible for a 100% dividends-received deduction.  Before making an election under Sec. 943(e), consult with a qualified international tax practitioner.