Taxation Of Us Tax Exempt Entities Offshore Hedge Fund Investments

Several tax issues involving hedge funds have been receiving substantial attention, both in the media and in Congress. One of these issues involves the immense amounts being invested in offshore hedge funds by tax-exempt entities such as university endowments and pension trusts. These investments are made offshore, in sunny spots like the Cayman Islands, to enable these tax-exempt investors to avoid tax liability. If the same investments were made domestically, the tax-exempt investors would be subject to tax at a rate of 35% on some portion of their investment income. This paper examines this disparate tax treatment and the history and policy behind the rules that give rise to it, and then considers several potential means of equalization.

U.S. investors are often confronted with the issue of investing in an offshore investment vehicle and hedge fund managers are often confronted with the issue of whether to set up a domestic fund, an offshore fund or both. Generally, U.S. tax-exempt investors and foreign investors invest in a manager's parallel offshore hedge fund or offshore feeder fund which is classified as a corporation for U.S. federal income tax purposes. Conventional wisdom is that U.S. taxable investors invest in the manager's parallel domestic fund or domestic feeder fund which is classified as a partnership for U.S. federal income tax purposes. But conventional wisdom is not always wise. This article discusses the tax issues that a U.S. investor should consider when investing in an offshore fund (and as a corollary what a hedge fund manager should consider when structuring his or her funds) with a particular focus on the various PFIC (i.e., passive foreign investment company) elections potentially available to a U.S. investor and highlights the potential affirmative tax benefits, although somewhat counterintuitive, of U.S. investors investing in offshore funds rather than in domestic funds.

Legal Ways to Save Taxes Offshore and Onshore is an annotated checklist of tax reduction methods that are sanctioned by the U.S. tax law and will work offshore or onshore. Each method includes an indication of whether it is affected by the alternative minimum tax. Reduction methods are organized in the sequence of the personal form 1040.

A new, lucid approach to the formulation of accounting policies for tax reporting Unraveling the layers of complexity surrounding the formulation of accounting policies for tax reporting, Taxation of US Investment Partnerships and Hedge Funds: Accounting Policies, Tax Allocations and Performance Presentation enables your corporation to implement sound up-front accounting and tax policies in order to reduce the overall cost of CFO and legal functions within a U.S. Investment partnership. Understand the pitfalls and optimize across legitimate policies that are consistent with the IRS regulations Presents a clear roadmap for accounting, tax policies, tax filing and performance presentation for US investment partnerships and hedge funds Providing tremendous understanding to a complex topic, Taxation of US Investment Partnerships and Hedge Funds is guaranteed to demystify the inner workings of the formulation of accounting policies for tax reporting.

On September 7, 2007 Rep. Sander Levin introduced legislation which would permit tax-exempt organizations to invest in onshore hedge funds without being subject to the unrelated business income tax ("UBIT"). The legislation amends section 514(c) to add an exception to "acquisition indebtedness" for "indebtedness incurred or continued by such partnership in purchasing or carrying any qualified security or commodity." A "qualified security or commodity" is "any security . . . any commodity . . . or any option or derivative contract with respect to such security or commodity." By providing an exception for acquisition indebtedness with respect to securities, those securities are removed from the definition of debt-financed property - property held to produce income that is subject to "acquisition indebtedness" during the tax year. As a result, any income from the debt-financed securities is excluded from debt-financed investment income, which is taxable under the UBIT regime. This would not create an entirely new investment vehicle for tax- exempt investors. They have been utilizing these types of investment vehicles for years by employing blocker entities to avoid paying UBIT on the income generated. Although some members of Congress are arguing for a prohibition against the use of blocker entities, their use has traditionally been blessed by the Internal Revenue Service ("IRS"). This note first examines the unrelated business taxable income ("UBTI") regime, the prohibition against debt-financed investments, and the current use of blocker entities. In Part II, this note examines the historical legislative policy reasons for enacting these prohibitions and the applicability of these policy reasons to investments in debt-financed investments, such as hedge funds. Part III of this note offers explanations as to why these historical rationales do not adequately support the continuation of the unrelated debt-financed rules. Part IV offers additional policy reasons outside the federal tax regime as to why the prohibition on debt-financed investments should be repealed.

An international panel of experts address the design and operation of offshore investment fund regimes. The book is comparative, dealing with topics issue-by-issue rather than country-by-country. (Legal Reference/Law)