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|Question 132: European Parent Corp. owns 83.33% of EuroCorpA, which in turn owns 100% of EuroCorpB, which in turn owns 100% of USACorp1. On the other side of this "family tree," European Parent Corp. also owns 100% of EuroCorpY, which in turn owns 98% of EuroCorpZ, which in turn owns 100% of USACorp2. USACorp1 and USACorp2 are the only US subsidiaries. They do not conduct business together or have common customers. In fact, they do not even communicate with one another! USACorp1 sponsors a 401(k) plan; USACorp2 does not. Must USACorp2's employees be covered (or at least tested) in USACorp1's plan as part of a controlled group?|
Answer: Yes, but that's not all.
IRC 1563(b)(2)(C) excludes foreign corporations from treatment as component members of a controlled group. Hence, for income tax purposes, the group would consist solely of USACorp1 and USACorp2.
However, IRC 414(b) does not incorporate the component member rules into pension law. The regulations are quite clear on this point. That means for pension purposes you must test employees of all the European and USA corporations as a single employer. Fortunately, as you do so, you can exclude nonresident aliens without U.S.-source income. See Q&A 103.
More discussion of the issues concern foreign parents is in Chapter 9 of my book, Who's the Employer?.
Answers are provided as general guidance on the subjects covered in the question and are not provided as legal advice to the questioner or to readers. Any legal issues should be reviewed by your legal counsel to apply the law to the particular facts of this and similar situations.
The law in this area changes frequently. Answers are believed to be correct as of the posting dates shown. The completeness or accuracy of a particular answer may be affected by changes in the law (statutes, regulations, rulings, court decisions, etc.) that occur after the date on which a particular Q&A is posted.