Senate bill targets offshore structures

Senator Carl Levin’s Stop Tax Haven Abuse Act would pose problems for GPs and LPs alike.

Private equity funds are once again in US Senator Carl Levin’s crosshairs.

In early March, Levin introduced the ‘Stop Tax Haven Abuse Act’, which would eliminate the “current practice by many US-based private equity and hedge funds of including within their structures vehicles organized in certain jurisdictions”.

For private equity firms with a significant investor base of non-US limited partners and US tax-exempt limited partners, this bill would be problematic. These investors rely on “blocker” corporations that are treated as non-US corporations for tax purposes to invest in the funds, so that their share of fund income does not incur US tax. If the bill passes, a blocker corporation for a fund managed by US residents would be subject to tax in the US on its worldwide income, resulting in a tax cost that would “certainly outweigh any benefits of the feeder or blocker corporation”, according to a memo from law firm Proskauer Rose.

Non-US corporations would be reclassified based on two tests: the non-US corporation must be either a corporation that has stock regularly traded on an established market or has aggregate gross assets under management at any time during the taxable year of at least $50 million; and the corporation must be managed and controlled primarily in the US, meaning that substantially all of the executive officers and senior management of the corporation are located in the US. The provision would be effective for tax years beginning two years after the bill’s enactment.

The bill also would expand the reporting requirements relating to passive foreign investment companies (PFICs) to include US persons who directly or indirectly form or have an interest in a PFIC. It would require unregistered funds, including private equity funds, establish anti-money laundering programmes and submit suspicious activity reports.