Advanced Tax Strategies in Structuring Private Investment Funds - PowerPoint PPT Presentation

Presenting a live 110-minute teleconference with interactive Q&A Advanced Tax Strategies in Structuring Private Investment Funds Balancing the Competing Interests of Fund Investors When Structuring Investment Funds THURS DAY, MAY 1, 2014 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: Christian M. McBurney, Partner, Nixon Peabody , Washington, D.C. Jeremy Naylor, Partner, Cooley , New Y ork Elizabeth Norman, Attorney, Goulston & Storrs , Boston The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

Tips for Optimal Quality FOR LIVE EVENT ONLY S ound Qualit y If you are listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-866-873-1442 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail sound@ straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Qualit y To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

Continuing Education Credits FOR LIVE EVENT ONLY For CLE credits, please let us know how many people are listening online by completing each of the following steps: • Close the notification box • In the chat box, type (1) your company name and (2) the number of attendees at your location • Click the S END button beside the box For CPE credits, attendees must listen throughout the program, including the Q & A session, and record verification codes in the corresponding spaces found on the CPE form, in order to qualify for full continuing education credits. S trafford is required to monitor attendance. If you have not printed out the “ CPE Form,” please print it now (see “ Handouts” tab in “ Conference Materials” box on left -hand side of your computer screen). Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

Program Materials FOR LIVE EVENT ONLY If you have not printed the conference materials for this program, please complete the following steps: • Click on the ^ symbol next to “ Conference Materials” in the middle of the left - hand column on your screen. • Click on the tab labeled “ Handouts” that appears, and there you will see a PDF of the slides for today's program. • Double click on the PDF and a separate page will open. • Print the slides by clicking on the printer icon.

May 1, 2014 Advanced Tax Strategies in Structuring Private Investment Funds Christian McBurney, Nixon Peabody LLP, Washington, D.C. office Jeremy Naylor, Cooley LLP, New York office Elizabeth Norman, Goulston & Storrs, Boston office 5

Fund Characteristics • Types of Funds — Private Equity — Venture Capital — Hedge — Distressed Debt — Real Estate — LBO — Fund of funds 6

Fund Characteristics (cont’d) • Ot her import ant fund charact erist ics — U.S .-based or based outside U.S .? — Focus investing in U.S . or outside U.S ., or both? — Is fund an investor or conducting a trade or business? › Investor: possible disallowance of fund manager fees for U.S . investors under S ection 212 › Trade or business: fees deductible under S ection 162; but UBTI, ECI and CAI concerns 7

Type of Fund Investors • U.S . Taxable Individual or Corporat ion • U.S . S t at e and Local Government — Pension Funds • U.S . Tax-Exempt Invest ors — Corporate Pension Plans — University and College Endowment Funds — Private Foundations — Charity Endowment Funds — Individual Retirement Accounts (IRAs) 8

Type of Fund Investors (cont’d) • Non-U.S . Invest ors — Individuals — Non-U.S . entities treated as corporations for U.S . income tax purposes — Pension Funds (not taxed in home country) • Non-U.S . Government Invest ors (S ect ion 892) — S overeign Wealth Funds — Pension Funds 9

U. S. Taxable Individuals and Corporations U.S. Taxable U.S. Individual Taxable C Corp. - 20% c.g. - 39.6% o.i. 35% c.g. and o.i. - 3.8% nii Fund L.P . - Gain on stock sale - Gain on interest sale - Dividends - Gain on asset sale - Interest - Interest - Gain on debt sale - Gain on debt sale Portfolio Portfolio LLC Corp. No Fund Blocker desired Unblocked investor can also claim tax credits and treaty benefits 10

U. S. State and Local Government U. S. State and Local Government 0% U.S . tax rate Fund L.P . Gain/ income Gain/ income Portfolio Portfolio LLC Corp. No Fund Blocker desired Unblocked can also claim treaty benefits 11

U. S. Tax-Exempt Investors U.S. Tax-Exempt 0% U.S . tax rate Fund L.P . - Gain on interest sale (c.g.) - Gain on stock sale - Interest - Dividends - Gain on debt sale (c.g.) - Interest - Gain on debt sale Portfolio Portfolio LLC Corp. - Gain on sale of noninventory property No Fund Blocker desired Unblocked investor can also claim treaty benefits 12

U. S. Tax-Exempt Investors (cont’d) U.S. Tax-Exempt 35% U.S . tax rate Fund L.P . Fees earned by L.P . Portfolio LLC - Operating income - Gain on sale of inventory Fund Blocker often desired Unrelated business taxable income (UBTI) 13

U. S. Tax-Exempt Investors (cont’d) U.S. Tax-Exempt 35% U.S . tax rate Debt -Financed: Debt -Financed: Fund L.P . - Gain on stock sale - Gain on interest sale - Dividends - Interest - Interest - Gain on debt sale - Gain on debt sale Portfolio Portfolio Debt -Financed: LLC Corp. - Gain on sale of any property - Operating Income Debt-financed income is UBTI Fund Blocker often desired 14

U. S. Tax-Exempt Investors (cont’d) Parallel Fund Structure U.S. Tax-Exempt Non-U.S. or U.S. Feeder Fund Non-U.S . U.S . U.S. Investments Investments Corp. Blocker (No UBTI) (No UBTI) Investments (UBTI) 15

Non-U.S. Investors • U.S . t ax goals — Avoid having to file a U.S . income tax return — Limit U.S . tax on “ Effectively Connected Income” (ECI). — If ECI: › Must file U.S . federal, state, and local returns › Must pay income tax at regular, federal, state and local rates • Non-U.S . corp must also pay U.S . 30% “ branch profits” tax — Limit U.S . tax on FDAP income › 30% U.S . withholding tax rate unless U.S . tax treaty applies › Claim U.S . treaty benefits where possible 16

Non-U.S. Investors (cont’d) • Effect ively Connect ed Income (ECI) is income recognized by a non-U.S . person t hat is effect ively connect ed wit h a business carried on in t he U.S . — Does fund have a loan origination business? — “ S ecurities trading safe harbor” protects offshore funds • ECI includes share of operat ing income from a pass- t hrough ent it y conduct ing business in t he U.S . — Non-U.S . partners are deemed engaged in a U.S . business — S ale of partnership interest in partnership that generates ECI: IRS takes the position that gain is ECI • FIRPTA income t reat ed like ECI 17

Non-U. S. Investors (cont’d) Non-U.S. Investor 0% U.S . tax rate U.S . S ource: Fund L.P . U.S . S ource: - Portfolio interest - Gain on stock sale - Gain on debt sale Non-U.S . S ource: - Gain/ income Portfolio Portfolio LLC Corp. Portfolio Corp. No Fund Blocker desired 18

Non-U. S. Investors (cont’d) Non-U.S. Investor 30% U.S . tax rate (unless treaty applies) Fund L.P . U.S . S ource: - Dividends - Non-portfolio interest Portfolio Corp. Treaty benefits can be claimed Non-U.S . pension fund from a treaty country – 0% U.S . tax rate No Fund Blocker desired 19

Non-U. S. Investors (cont’d) Non-U.S. Investor 35% / 39.6% U.S . tax rate Fund L.P . Gain on interest sale (ECI) Portfolio LLC U.S . S ource: - Gain on sale of operating assests (ECI) - Operating income (ECI) Fund Blocker usually desired 20

Non-U. S. Investors (cont’d) Parallel Fund Structure Non-U.S. Investor Non-U.S. or U.S. Feeder Fund Non-U.S . U.S . U.S. Investments Investments Corp. Blocker (No ECI) (No ECI) U. S . Investments (ECI) 21

U.S. Tax-Exempt Investor (cont’d) Parallel Fund Structure • Why use non-U.S . Feeder? — Not have to report non-U.S . investments — Can avoid "controlled foreign corporation" (CFC) treatment where substantial investors are non-U.S . investors and fund owns 50% or more of the non-U.S . portfolio company — Minimize risk that Fund interest will be treated as part of non-U.S . individual investor’s estate for U.S . estate tax purposes 22

U.S. Tax-Exempt Investor (cont’d) Parallel Fund Structure • Why use U.S . Feeder? — Easier to claim U.S . treaty benefits— only need to issue W-8BEN to U.S . Feeder — Will treaty benefits "flow-through" a non-U.S . Feeder to a non-U.S . investor? Generally, non-U.S . entity must be fiscally transparent for non-U.S . as well as U.S . purposes › S ee also S ection 894(c). 23