In this series. Both routes are aimed at a classification. They are not available at the same moment. The liability clause supplies the default when classification first becomes relevant. The seventy-five-day window is the ordinary timing rule for an election. An elective change has deemed consequences. The family holding-company discussion is The Form 8832 Election in Offshore Holding Structures. This note is about a fund. The practice page is Cayman funds.
Sponsors are sometimes told that amending the liability clause and filing Form 8832 are two ways of reaching the same classification. Under the current regulations they are two different acts, and only one of them changes a classification that is already relevant. They can both leave a fund as a partnership for U.S. tax purposes. They do not both do that work after a U.S. person is in the structure.
Before classification is relevant
Section 301.7701-3(d)(2) provides that if a foreign eligible entity's classification has never been relevant, the initial classification is determined under the foreign default rules at the moment it first becomes relevant. If, at that moment, the entity has two or more members and at least one does not have limited liability, the default is a partnership. If the single owner does not have limited liability, the default is a disregarded entity. If every member has limited liability, the default is a corporation.
The instructions to Form 8832 tell a new eligible entity not to file the form if it will use its default classification. An amendment that, under the organizing law, sets the liability regime before relevance begins can be what produces the default you want. That amendment changes people's actual legal position, and it requires whatever approvals and filings the organizing law and the documents require. Local counsel runs that process.
An election is available as well, including an initial classification election that is effective on the date of formation. Section 301.7701-3(c)(1)(iv) provides that an election by a newly formed eligible entity that is effective on the date of formation is not a change for purposes of the sixty-month limitation. That election does not alter anyone's rights under the organizing law. It classifies the entity for U.S. tax.
After classification is relevant
Section 301.7701-3(a) provides that an entity whose classification is determined under the default retains that classification regardless of changes in the members' liability during the time the classification is relevant, until the entity makes an election to change it. An amendment of the liability clause at that point may change local-law exposure, if the amendment is effective under the organizing law. It does not, under paragraph (a), change the U.S. classification.
The election does. It is filed on Form 8832. Section 301.7701-3(g) states the deemed transactions for an elective change, including the liquidation and recontribution that the regulations prescribe when an association elects to be a partnership. Those consequences are written down. They are the subject of Changing Classification Is Not Free. An amendment made in the hope of the same deemed events is reading a consequence paragraph (a) does not give.
| Question | Amending the liability clause | Form 8832 election |
|---|---|---|
| Does it change local-law liability? | It can, if the amendment is effective under the organizing law. Local counsel runs that process. | No. The election does not change rights under the organizing law. |
| Does it change the U.S. classification? | Not while classification is relevant. Paragraph (a) retains the existing classification until an election. | Yes, if the election is valid. Paragraph (g) states the deemed transactions. |
| What has to be signed? | Whatever the organizing law and the documents require for an amendment. | The signature rule in section 301.7701-3(c)(2), described below. The entity's taxpayer identifying number has to be on the form. |
What the election requires, and what it does not
Section 301.7701-3(c)(1)(i) provides that an election will not be accepted unless the information required by the form and instructions is provided, including the entity's taxpayer identifying number. The published instructions to Form 8832 (Rev. December 2013) state that the entity must have received an employer identification number by the time the form is filed, and that a foreign entity uses its own number. An entity that already has a number does not apply for a new one merely because the classification will change.
Section 301.7701-3(c)(2) requires the election to be signed by each member who is an owner when the election is filed, or by any officer, manager, or member who is authorized under local law or the organizational documents to make the election and who represents to that authorization under penalties of perjury. The published instructions restate that alternative. If the election is effective for a period before it is filed, each person who was an owner between the effective date and the filing date, and who is not an owner at filing, must also sign. If the election changes the classification, each person who was an owner on the date the deemed transactions under paragraph (g) occur, and who is not an owner at filing, must also sign.
There is no requirement of a local corporate amendment, and no requirement that anyone's local-law liability change. There is a signature rule. For a retroactive election, and for an election that changes classification, the rule reaches certain former owners. An express authorization for the manager to sign a U.S. classification election lets the fund use the authorized-person branch of paragraph (c)(2)(i). The regulation does not say that this authorization displaces the additional signatures in paragraphs (c)(2)(ii) and (iii). We do not treat it as a waiver of those signatures. Putting the authorization in the documents is still worth doing, including in an amendment you are making for another reason. It is the difference between a filing the manager can sign and a search for a signer when the authorized-person branch is the one you intend to use.
The sixty-month limitation is in paragraph (c)(1)(iv). An election to change classification cannot be followed by another elective change during the sixty months after its effective date. The Commissioner may permit an earlier change if more than fifty percent of the ownership interests, as of the effective date of the later election, are owned by persons who did not own any interest on the filing date or the effective date of the prior election. The form instructions describe that permission as a private letter ruling. An initial election by a newly formed entity, effective on the date of formation, is not a change for this purpose.
Recalde Law Firm, P.A. is a Florida law firm with an office in Miami, Florida. We advise on United States law only. We do not practice Cayman law (or the law of any other country). Formation of a Cayman (or other non-U.S.) vehicle, Cayman legal advice, and CIMA registration stay with qualified Cayman counsel. We coordinate; we do not replace them. This is general information, not an offer of fund interests, and not Cayman legal advice.
The firm works on the U.S. structure and documents. The tax adviser prepares the returns and models the numbers.