Blocker C Corporations and the Impact of the One Big Beautiful Bill Act
Investors in U.S. businesses, particularly nonresident foreign investors and U.S. tax-exempt entities, often face unique tax considerations when structuring investments. One common planning tool used to manage these considerations is a “blocker” C corporation. A blocker C corporation can help mitigate exposure to certain U.S. tax filing obligations, limit the character of income flowing to investors, and provide structural advantages in private equity and real estate investments. Whether implemented through an investment vehicle or as part of broader tax planning for nonresident foreign taxpayers, the use of a blocker C corporation may be advantageous in several contexts.[1]
Overview of Blocker C Corporations
Generally, a blocker C corporation effectively “blocks” the character of taxable income at the corporate level. A U.S. incorporated blocker C corporation is subject to U.S. income tax resulting in any income, gain, deduction, or loss being taxed at the corporate level.[2]
Without a blocker structure, taxable income allocated to a nonresident foreign taxpayer through a pass-through entity, such as a partnership, would typically be reported on a Schedule K-1 and treated as income effectively connected with the conduct of a trade or business within the United States (ECI).[3] Under U.S. tax rules, income derived by a nonresident foreign person engaged in a U.S. trade or business from U.S. sources is generally treated as effectively connected income unless it consists of certain fixed or periodic gains or capital gains.[4]
The formation of a blocker C corporation can prevent a foreign taxpayer from receiving ECI directly. As a result, the structure may reduce exposure to U.S. income tax filing requirements and the administrative burden associated with filing U.S. tax returns.[5]
Investment Flexibility
A blocker C corporation may be used in a variety of investment arrangements, including private equity structures, operating business investments, and U.S. real estate transactions. When properly implemented, the structure can limit the flow-through of certain categories of taxable income to foreign or tax-exempt investors and may reduce the administrative and compliance burdens associated with direct ownership. For example, nonresident foreign investors may choose to invest through a blocker when:
- Establishing a U.S. business rather than forming a partnership or S corporation
- Participating in private equity or venture capital funds
- Investing in operating companies or portfolio investments in the United States
By interposing a blocker entity between the investor and the operating business, foreign shareholders may avoid directly earning U.S. business income while still maintaining economic exposure to the investment. This use of a blocker C corporation helps alleviate foreign individual taxpayers from potentially subjecting themselves to U.S. tax filing obligations. With this structure, foreign shareholders of the blocker C corporation would not directly earn income and may reduce their tax liability.[6]
Blocker corporations may also be advantageous for U.S. tax-exempt investors, including pension funds, university endowments, and charitable organizations. When tax-exempt investors participate in certain investment activities—particularly leveraged or operating business investments—the resulting income may constitute unrelated business taxable income (“UBTI”).
UBTI is generally subject to federal income tax notwithstanding the investor’s tax-exempt status. By investing through a blocker C corporation, the income generated by the underlying investment is taxed at the corporate level, thereby preventing the tax-exempt investor from directly recognizing UBTI.
Blocker C Corporations Post-One Big Beautiful Bill Act Enactment
The One Big Beautiful Bill Act (“OBBA”) provided provisions that keep the use of a blocker C corporation as an attractive structure mechanism. One such way a blocker C corporation remains advantageous for taxpayers, especially non-resident foreign individuals, is OBBBA continues the current tax rates from 2025 to tax years beginning after December 31, 2025. The highest tax bracket for individuals remains at 37% and corporate tax remains at 21%. The lower corporate tax rate remains intriguing and a pivotal factor for forming a blocker C corporation.
Additionally, OBBBA permanently reinstated the limitation based on earnings before interest, tax, depreciation, and amortization (EBITDA).[7] The 30% business interest expense limitation previously was based on earnings before interest and taxes. This change creates a more favorable calculation for taxpayers, which may be beneficial for funds or investors utilizing blocker C corporations. As noted above, taxpayers invested in private equity are sensitive to UBTI, and the change in the business interest expense limitation may increase the efficiency of blocker C corporations.
As a result of the changes to Section 163(j), taxpayers now have the ability to claim greater interest deductions. Investments through a leveraged blocker structure benefit from the addition of depreciation and amortization, and such investments may now be more appealing. Thus, with the implementation of 30% business interest expense limitation based on EBITDA, investors in leveraged investments may look to blocker C corporations.
Conclusion
Blocker C corporations remain a widely used structuring tool for nonresident foreign investors and U.S. tax-exempt investors participating in U.S. investments. By interposing a corporate entity between the investor and the underlying operating business or investment vehicle, the structure can mitigate exposure to effectively connected income, reduce U.S. filing obligations, and address concerns related to unrelated business taxable income.
Recent legislative developments—including the continuation of the 21 percent corporate tax rate and the reinstatement of the EBITDA-based business interest expense limitation—may further reinforce the viability of blocker C corporations as part of sophisticated investment structures for foreign investors.
Footnotes:
[1] This article focuses on U.S. blocker C corporations. Taxpayers may also utilize foreign blocker C corporations as part of their tax planning.
[2] Corporate income is subject to a federal income tax rate of 21%. See I.R.C. § 11.
[3] I.R.C. § 871(b)(2).
[4] Treas. Reg. § 1.864-4(b).
[5] Effectively connected income is subject to a graduated tax rate for individuals. See I.R.C. §§ 871(b)(1).
[6] Stockholders may be subject to U.S. withholding taxes on dividends from the Blocker C Corporation.
[7] I.R.C. § 163(j).
Authored by Scott St. Lifer
Picture Credit: “Tax Refund – Written on a calculator” by efile989 is licensed under CC BY-SA 2.0.
Asbury Gardner, Tax Counsel, is an Atlanta law firm representing clients in complex civil and criminal tax litigation and federal, international, and state tax litigation and tax controversies. Asbury Gardner represents corporations, partnerships, business owners and high net worth individuals. The tax attorneys at Asbury Gardner are routinely recognized by Best Lawyers in America, Super Lawyers, Chambers USA, and the Legal 500 as tax experts.
