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US Corp owns Foreign Entities

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When considering controlled group or affiliated service group issues with respect to a US corporation, is it true that one cannot simply disregard a foreign business owned by that US corp? If that foreign entity employed US citizens?

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Controlled groups know no international boundaries.  Back in the 80s when we thought the Japanese were going to own us, some Japanese companies got into trouble because they did not recognize the controlled group relationships relating to US subsidiaries, which were in different businesses and in different parts of the country, and had no domestic relationships with each other.

However, that high level response is not the only consideration for your question relation to U.S. foreign affiliates and employment of U.S. citizens.

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IRC 1563(b)(2)(C) generally excludes foreign companies from being "component members" of the controlled group they are otherwise included in. This has corporate tax consequences. However, for employee benefit purposes, the "component member" rules are not relevant. You are looking only at what is the controlled group under 1563(a). See IRC sec. 414(b) and Treas. reg. 1.414(b)-1(a).

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Since foreign companies may be part of the controlled group, this may affect your coverage testing under section 410(b).  However, employees who are nonresident aliens and who receive no earned income from the employer that is from U.S. sources are treated as excludable employees.  Treas. Reg. 1.410(b)-6(c).  

This means that - for the sake of completeness - you may need to count the number of foreign employees and then subtract them out as excludable employees.  Some employers don't bother or use estimates since it does not change result.  If you prefer precision, then you will want to jump through the hoops.

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Any thoughts about whether IRC sec. 414(b) and Treas. reg. 1.414(b)-1(a) would apply in connection with determining whether foreign parent stock is permissible under 409(L) for ESOP-related purposes?  there's a 1991 PLR that says yes, but it's based on a regulation that is no longer in force.   

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