09 Nov 2021
Blocks Aren’t Just for Children! Using Blocker Corporations in Private Equity Structuring
Blocker corporations are a common part of private equity (PE) structures and may be an effective tax planning tool because they effectively “block” the flow-through of taxable income at the corporate level for federal, state, and local income tax purposes. They are employed most often when a PE fund invests in a U.S. based business that is taxed as a partnership for U.S. federal income tax purposes. There, taxable income passed through on a Schedule K-1 by a portfolio company generally falls into the category of income “effectively connected with a U.S. trade or business” for foreign investors and unrelated business taxable income (UBTI) for U.S. tax-exempt investors. Foreign investors and others want to avoid this scenario, which can lead to a U.S. income tax filing requirement and a possible U.S. federal income and withholding tax impact.
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Learn about the way private equity funds use, or face, passive foreign investment companies or PFICs, specifically on how private equity funds may invest in PFICs. For example, a PFIC serving as an offshore feeder fund, through which a U.S. tax-exempt investor or a non-U.S. investor invests in a private equity master fund formed as a U.S. or foreign partnership, can serve as a blocker for all of the fund’s U.S.-source income.
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Practical Guidance Updates
Featuring the latest updates from your Practical Guidance account.
- Tax Key Legal Developments Tracker (Federal)
Stay informed on new developments:- Business Entities. IRS releases new final versions of the following forms and instructions: Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities); and Form W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States.
- Exempt Organizations. IRS sets forth current standards that an LLC must satisfy to receive a determination letter recognizing it as tax-exempt under I.R.C. Section 501(a) and described in I.R.C. Section 501(c)(3). IRS also requests public comments on these standards as well as specific issues relating to tax-exempt status for LLCs. R.S. Notice 2021-56; 2021-45 IRB 1.
- Document alerts allow you to stay current on legal developments that affect your practice. Find out how to set up your document alerts.
- The Practical Guidance Journal Fall 2021 Edition features Environmental, Social, and Governance guidance.
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- Estate, Gift, and Generation-Skipping Transfer (GST) Taxes Resource Kit
- U.S. Income Tax Treaties Fundamentals
- IRS Says Reliance on FAQs Will Provide Penalty Defense
- 3 SALT Cases to Watch at the Supreme Court This Term
- 136 Jurisdictions Agree to Global Tax Pact, 15% Rate
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