Presenting a live 110 ‐ minute teleconference with interactive Q&A Tax Considerations in Structuring Private Investment Funds Balancing the Competing Interests of Fund Investors When Structuring Investment Funds THURSDAY, MAY 2, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Christian M McBurney Partner Nixon Peabody Washington D C Christian M. McBurney, Partner, Nixon Peabody , Washington, D.C. Jeremy Naylor, Partner, White & Case , New York Elizabeth Norman, Attorney, Goulston & Storrs , Boston Attendees seeking CPE credit must listen to the audio over the telephone. Please refer to the instructions emailed to registrants for dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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May 2, 2013 Tax Considerations in Structurin in Structuring Private Equity Funds q y Balancing the Competing Interests of Fund Investors Balancing the Competing Interests of Fund Investors When Structuring Investment Funds Christian McBurney, Nixon Peabody LLP, Washington, D.C. office Jeremy Naylor, White & Case LLP, New York office Eli Elizabeth Norman, Goulston & Storrs, Boston office b th N G l t & St B t ffi 5
Fund Characteristics Types of Funds • — P i Private Equity E i — Venture Capital — Hedge Hedge — Distressed Debt — Real Estate — LBO — Fund of funds 6
Fund Characteristics (cont’d) Other important fund characteristics • — U S b U.S.-based or based outside U.S.? d b d id U S ? — Focus investing in U.S. or outside U.S., or both? — Is fund an investor or conducting a trade or business? Is fund an investor or conducting a trade or business? › Investor: possible disallowance of fund manager fees for U.S. investors under Section 212 › Trade or business: fees deductible under Section 162; but UBTI, ECI and CAI concerns 7
Type of Fund Investors U.S. Taxable Individual or Corporation • U.S. State and Local Government S S d l G • — Pension Funds U.S. Tax-Exempt Investors U S Tax Exempt Investors • — Corporate Pension Plans — University and College Endowment Funds University and College Endowment Funds — Private Foundations — Charity Endowment Funds y — Individual Retirement Accounts (IRAs) 8
Type of Fund Investors (cont’d) Non-U.S. Investors • — I di id Individuals l — Non-U.S. entities treated as corporations for U.S. income tax purposes p p — Pension Funds (not taxed in home country) Non-U.S. Government Investors (Section 892) • — Sovereign 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 Corp. No Fund Blocker desired N F d Bl k d i d Unblocked investor can also claim tax credits and treaty benefits 10
U. S. State and Local Government U. S. State and L Local Government l G t 0% U.S. tax rate Fund L.P . Gain/income Gain/income Gain/income Gain/income Portfolio Portfolio LLC Corp Corp. N F No Fund Blocker desired d Bl k d i d 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 - Gain on debt sale Portfolio Portfolio LLC Corp. p - Gain on sale of noninventory property N F No Fund Blocker desired d Bl k d i d 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 Fund L.P . . Fees earned by L.P . Portfolio LLC - Operating income p g - Gain on sale of inventory Fund Blocker often desired F d Bl k ft d i d 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 - Gain on sale Gain on sale Corp. Corp. of any property - Operating Income D bt fi Debt-financed income is UBTI d i i UBTI Fund Blocker often desired 14
U. S. Tax ‐ Exempt Investors (cont’d) Parallel Fund Structure Parallel Fund Structure U.S. Tax-Exempt p Non-U.S. or U.S. Feeder Fund Non-U.S. U.S. U.S. Investments Investments Corp. Blocker (N UBTI) (No UBTI) (N UBTI) (No UBTI) Investments (UBTI) (UBTI) 15
Non ‐ U.S. Investors U.S. tax goals • — A Avoid having to file a U.S. income tax return id h i fil U S i — Limit U.S. tax on “Effectively Connected Income” (ECI). — If 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) Effectively Connected Income (ECI) is income recognized • by a non U S person that is effectively connected with a 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? g — “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 — S l f Sale of partnership interest in partnership that generates hi i i hi h ECI: IRS takes the position that gain is ECI FIRPTA income treated like ECI FIRPTA income treated like ECI • 17
Non ‐ U. S. Investors (cont’d) Non-U.S. Investor 0% U.S. tax rate U S S U.S. Source: Fund L.P d . U.S. Source: - Portfolio interest - Gain on stock sale - Gain on debt sale Non-U.S. Source: - Gain/income Portfolio Portfolio LLC Corp Corp. Portfolio 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 Fund L.P . . U.S. Source: - Dividends - Non-portfolio interest Portfolio Corp Corp. Treaty benefits can be claimed y 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 Fund L.P . Gain on interest sale (ECI) Portfolio LLC U.S. Source: - Gain on sale of operating assests (ECI) - Operating income (ECI) Fund Blocker usually desired 20
Non ‐ U. S. Investors (cont’d) Parallel Fund Structure 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 (N ECI) (No ECI) (N ECI) (No ECI) U. S. Investments Investments (ECI) 21
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