Presenting a live 110-minute teleconference with interactive Q&A Tax Challenges With U.S.-Based Private Equity Fund Formation Maximizing Benefits for Clients Given Diverse Investor Tax Objectives THURSDAY, AUGUST 15, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Elizabeth Norman, Attorney, Goulston & Storrs , Boston Joshua V. Azran, Owner , Azran Financial , Century City, Calif. David Benz, Principal, Rothstein Kass , Beverly Hills, Calif. Please refer to the instructions emailed to the registrant for the dial-in information, including options for phone or Web sound for one or multiple listeners. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Tax Challenges With U.S.-Based Private Equity Fund Formation Aug. 15, 2013 Joshua V . Azran, Azran Financial David H. Benz, Rothstein Kass jazran@azranfinancial.com dbenz@rkco.com Elizabeth M. Norman, Goulston & Storrs enorman@goulstonstorrs.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Fund Characteristics Types of funds • — Private equity — Venture capital — Hedge — Distressed debt — Real estate — LBO — Fund of funds 7
Fund Characteristics (Cont.) Other important fund characteristics • — 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 Sect. 212 › Trade or business: Fees deductible under Sect. 162, but UBTI, ECI and CAI concerns 8
Type Of Fund Investors U.S. taxable individual or corporation • U.S. state and local government • — Pension funds U.S. tax-exempt investors • — Corporate pension plans — University and college endowment funds — Private foundations — Charity endowment funds — Individual retirement accounts (IRAs) 9
Type Of Fund Investors (Cont.) Non-U.S. investors • — 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 investors (Sect. 892) — Sovereign wealth funds — Pension funds 10
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. 11
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. 12
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 non-inventory property No fund-blocker desired Unblocked investor can also claim treaty benefits. 13
U. S. Tax-Exempt Investors (Cont.) 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) 14
U. S. Tax-Exempt Investors (Cont.) 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 15
U. S. Tax-Exempt Investors: 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) 16
Non-U.S. Investors U.S. tax 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 17
Non-U.S. Investors (Cont.) Effectively connected income (ECI) is income recognized by a • non-U.S. person that is effectively connected with a business carried on in the U.S. — Does fund have a loan origination business? — ―Securities trading safe harbor‖ protects offshore funds. • ECI includes share of operating income from a pass-through entity conducting business in the U.S. — Non-U.S. partners are deemed engaged in a U.S. business. — Sale of partnership interest in partnership that generates ECI; IRS takes the position that gain is ECI. FIRPTA income treated like ECI • 18
Non-U.S. Investors (Cont.) Non-U.S. Investor 0% U.S. tax rate U.S. Source: Fund L.P. U.S. Source: - Portfolio interest - Gain on stock sale - Gain on debt sale Non-U.S. Source: - Gain/income Portfolio Portfolio LLC Corp. Portfolio Corp. No fund-blocker desired 19
Non-U.S. Investors (Cont.) Non-U.S. Investor 30% U.S. tax rate (unless treaty applies) Fund L.P. U.S. Source: - 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 20
Non-U.S. Investors (Cont.) Non-U.S. Investor 35%/39.6% U.S. tax rate Fund L.P. Gain on interest sale (ECI) Portfolio LLC U.S. Source: - Gain on sale of operating assets (ECI) - Operating income (ECI) Fund-blocker usually desired 21
Non-U.S. Investors: 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) 22
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