Block-and-Tackle: Using Blocker Corporations in Private Equity Planning

When tax-exempt or non-U.S. taxpayers invest in U.S. businesses, unwanted and unintended U.S. tax obligations can follow without careful planning. Blocker corporations have become a common strategy employed by private equity (PE) funds, particularly in buyout transactions, to shield or block various tax attributes from automatically flowing through to the ultimate owner or taxpayer. By understanding the role of blocker corporations and their ability to shield certain tax attributes, practitioners can help clients mitigate potential tax liabilities, ensure compliance, and protect their financial interests.

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Related Content

• An Introduction to the Use of Blocker Corporations in M&A Transactions
  Learn more about the benefits of blocker corporations in private equity (PE) transactions. Blocker corporations effectively "block" taxable income at the corporate level for U.S. federal, state and local income tax purposes. When a PE firm structures a leveraged buyout, some PE investors, generally tax-exempt and foreign investors, will invest directly or indirectly in portfolio company equity through one or more newly formed C corporations that are blocker corporations. The blocker corporation blocks the flow-through of income on a Schedule K-1 at the corporate level that could otherwise subject a non-U.S. investor to a U.S. tax filing.

• Tax Considerations in Structuring a Private Equity Fund
  Reference this practice note that discusses how, in addition to foreign entities, tax-exempt organizations, such as pension funds, will typically hold a PE interest through a blocker corporation to ensure that they do not earn unrelated business taxable income (UBTI), which is taxable and could affect an organization's tax-exempt status.

• Private Equity Transactions Resource Kit
  Reference this resource kit which includes a host of guidance and materials to navigate different private equity transactions.

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