and Reconciliation Act of 2005. Foreign owners of US corporations also benefit from the ability to have entities normally treated as flow-through instead be taxed as corporations by the IRS. In what is sometimes known as a "domestic reverse hybrid" strategy, a non-US corporation may set up a US holding company which elects to be treated as a corporation for US tax purposes, but which its home country tax law sees as a flow-through entity. The US holding company receives a loan from its home country parent which it invests in a US operating subsidiary; the US holding company receives dividends from the US operation subsidiary and pays interest to the non-US parent. US tax law thus sees a US company making a dividend payment to another US company (which is thus not subject to withholding tax, unlike a dividend paid to a foreign company) which then pays interest to a foreign company, while the home country tax law will see a US company paying dividends directly to its home country parent. Under typical treaties for the relief of double taxation, neither government has the right to tax the payment, because each sees it as a type of payment which only the other has the right to tax. History Prior to 1996, whether domestic and foreign entities were classified as corporations was based on a six-factor test which looked at: limited liability; continuity of life; free transferability of interests; centralized management; associates; objective to carry on business for joint profit An entity which had a preponderance of the first four factors (the last two, in practice, were shared by all business entities) was treated as a corporation, otherwise as a partnership or an association. In practice, however, this test was easily manipulated. The "check-the-box" regulations (Treasury Decision 8697) were adopted in 1996 in order to simplify the issue of entity classification. A grandfather clause allowed entities in existence on May 8, 1996 to continue using their previous classification, even if they would no longer be eligible to elect that classification under the new rules. There were three conditions for this grandfathering: the entity had a reasonable basis (within the meaning of section 6662) for its claimed classification; the entity and all owners recognized the federal tax consequences of any change in classification within 60 months prior to January 1, 1997; and neither the entity nor its owners had been advised