Separate Unit Combination Explained
P is the common parent of a consolidated group. P owns DE3Y, which in turn owns DE1X, which owns FBX. P also owns DRCX, a member of the group that carries on Country X business operations constituting a foreign branch (FB2X) within the meaning of § 1.367(a)-6T(g)(1). S, another member, owns DE2X. Finally, P owns 50 percent of PRS, a partnership for both U.S. and Country X tax purposes (the other 50 percent is held by an unrelated foreign person); PRS carries on a Country X business operation that would be a foreign branch (FB1X) if carried on directly by a U.S. person.
Under § 1.1503(d)-1(b)(4)(ii), the interest in DE1X, the interest in DE2X, FBX, P’s share of PRS’s Country X business operations (FB1X, owned indirectly through P’s partnership interest), and DRCX’s Country X business operations (FB2X) are combined and treated as a single separate unit of the consolidated group of which P is the parent. This combination applies regardless of whether the losses of each individual separate unit are available to offset the income of the other individual separate units under Country X law.
Because DRCX is a dual resident corporation, it is not itself combined into or treated as part of the combined separate unit; DRCX’s income or dual consolidated loss is not taken into account in determining the income or dual consolidated loss of the combined separate unit. In addition, P’s interest in DE3Y is not combined and is a separate unit of its own, because it is subject to tax in Country Y rather than Country X.
