We advise our clients on a broad range of international structuring issues, most of which are geared towards managing the level of tax risk for investment funds and management companies and enhancing post-tax returns for investors by reducing tax leakages.
Structuring an investment fund is complex for a variety of reasons. A simple structure soon becomes complex as the differing needs and sensitivities of the various stakeholders, investors, principals, and portfolio companies are taken into account. A fund should be structured with an eye to tax efficiency and the needs of differing investor groups in light of the underlying asset classes and investment opportunities.
Through careful planning, we can advise on structuring the fund and choosing appropriate legal entities to mitigate potential global tax levies. We also seek to manage the global tax filings for the different investor groups (e.g., non-US investors, sovereign wealth funds, and US taxable and non-taxable investors). Some of the key US international tax issues that are normally addressed as well are: US branch profits tax, US withholding tax, portfolio interest exemption, FIRPTA, CFC and PFIC rules. We may also review offering documents, including those related to listing events, whether at the fund and/or management company level. We also work with multimanager/fund of funds clients. Although the basic principles and complexities relating to fund structuring also apply to this segment of the fund industry, a different approach and process is required in tax planning.
Our team advises on acquisition structures for global investments in the liquid and illiquid space and has developed efficient structures for a broad range of assets including private equity, infrastructure, real estate, real estate derivatives, hospitality, agriculture, etc. Most funds are set up as tax-exempt vehicles and we can help navigate the complexities and ambiguities of US and non-US tax law in assisting the client to choose tax efficient acquisition structures to mitigate US and foreign withholding and capital gains taxes, and to streamline foreign tax filing and compliance requirements. We can assist with managing the tax aspects of cross-border deals as well as assisting with the launch of new products (e.g., carbon credits, exchange traded funds, etc.), while at the same time addressing the potential tax aspects of exit opportunities.
Our deal structuring services also include assistance to investors when investing in existing funds. Depending on the investor profile, the fund structure and the asset class (e.g., private equity, infrastructure or real estate), we provide investors with tax advice on how to best invest in a chosen fund, as well as on potential tax risks and the expected tax burden on their return on investment.
To the extent that internationally based investment professionals have discretionary authority to manage a fund’s investments or have trading responsibilities, it is imperative that their activities do not expose the fund to unnecessary taxation in the various jurisdictions in which it operates. Whether activities satisfy a safe harbor’s definition of “trading and investing” is a facts-and-circumstances analysis that requires continuous monitoring. We can assist you with this analysis and help you to develop pragmatic internal solutions, such as developing operating guidelines, to ensure that your internationally based investment professionals conduct their business within the boundaries of specific trading safe harbors.
We can also advise on compensation planning for the principals of your management company, particularly those who will participate in any incentive compensation fees. The rules governing the tax treatment of carried interest (“the carry”) and the ability to defer management fees are subject to intense scrutiny and debate in recent times. We have already seen restrictions imposed on the ability of hedge fund managers to defer fees, and most tax practitioners and commentators anticipate a change with respect to the taxation of carried interest. Working with our partner firm's legislative team in Washington, we are well positioned to anticipate the effect of any law changes and, where appropriate, help you take remedial actions. Further, we can also review transfer pricing methodology related to the transactions between affiliates and/or branches to ensure that the methodology complies with US and non-US tax law.
As there has been a significant increase in audit activity abroad from foreign tax authorities, funds should focus on applying a more global holistic planning approach. We can assist you in reviewing your global tax and permanent establishment risk for your funds and management company. We can assess any prevailing permanent establishment, nexus and residency exposures for your various funds, carry vehicles, and other offshore entities in the jurisdictions in which you operate and can advise on best practice methodologies to help reduce global tax risk.
At FTS, our clients' needs are our sole concern. Our independence from audit services helps avoid common conflicts of interest. To learn more about the full range we provide to the Alternative Investment Industry or to speak with our tax professionals, please contact us.