Planning Is Paramount! Taxation Issues in Private Equity Investment

Learn about tax issues related to private equity funds existing at the fund, general partner/manager, investor, and portfolio levels and methods developed by the private equity industry to structure around adverse tax consequences. The goal in structuring an investment product is to achieve the most efficient and cost-effective framework, given the form of management, investor base, and portfolio content, while concurrently paying the minimum tax at all levels. 

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Related Content

• PFICs and Private Equity
  Discover the role played by Passive Foreign Investment Companies (PFICs) due to two aspects of U.S. tax law. First, as a non-U.S. corporation, a PFIC will not be subject to U.S. corporate income tax generally and will not be required to file U.S. corporate income tax returns, so long as it does not engage in a U.S. trade or business. Second, U.S. persons who are shareholders in a PFIC are subject to special tax rules designed to prevent the deferral of income tax on the build-up of investment income and gain inside the PFIC.
• Foreign Equity Offerings in the U.S.: Tax Consequences for Investors
  Review this practice note which discusses the principal U.S. federal income tax consequences to a private fund and its investors of owning common stock or American Depository Shares (ADSs) of a foreign corporate issuer. 
• International Withholding Tax: Guidance for Fund Lawyers
  Explore the Base Erosion Profit Sharing (BEPS) by reading this practice note which elaborates on the impact of BEPS on international withholding tax regimes and on the effect of BEPS in jurisdictions in which U.S. private equity shops commonly invest.

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 amplifies Rev. Proc. 2021-3, which lists areas of the IRC relating to issues on which the IRS will not issue letter rulings or determination letters. IRS announces that it will not issue letter rulings on whether certain transactions are self-dealing within the meaning of I.R.C. § 4941(d). Specifically, IRS will not issue rulings on whether an act of self-dealing occurs when a private foundation (or other entity subject to section 4941) owns or receives an interest in a limited liability company or other entity that owns a promissory note issued by a disqualified person. Rev. Proc. 2021-40.
    The DOJ responds to a complaint denying that virtual currency is in all instances property under U.S. tax law in contradiction of I.R.S. Notice 2014-31. Jarrett v. United States, Case No. 3:21-cv-00419.
  • Employment/Employee Benefits: IRS outlines the procedures for issuing opinion letters regarding the satisfaction in form I.R.C. 403(b) pre-approved retirement plans for the second remedial amendment cycle which will begin May 2, 2022, and end May 1, 2023. IRS also extended the deadline for interim plan amendments relating to I.R.C. Section 403(b) requirement changes providing that amendments to preapproved plans are timely if they are adopted by the employer by the end of the second calendar year after required changes go into effect for the plan. Proc. 2021-37.
  • Exempt Organizations: IRS provides temporary guidance on the R.C. § 147(f)public approval requirement for tax-exempt qualified private activity bonds. Rev. Proc. 2021-39.

• IRS Corner
  • Unused qualified transportation cards remain a problem. IRS, Office of Chief Counsel Letter 2020-0031 made clear that, in no case, may an employer provide a cash refund of a transportation fringe benefit. See Reg. § 1.132-9, Q&A 14. An employee may receive a cash reimbursement of compensation reduction amounts only as a reimbursement of qualified transportation fringes, as defined under I.R.C. § 132(f)(1). IRS guidance permits employees to roll over any unused mass transit/vanpooling commuter account balance to the parking benefit balance, and vice versa. IRS, Office of Chief Counsel 2020-0024; see also IRS, FAQs About COVID Relief for Van Pools; Fringe Benefit Rules (I.R.C. § 132).
  • The financial status of the Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) combined trust funds are projected to become depleted in 2034, with 78% of benefits payable at that time. The DI Trust Fund is estimated to become depleted in 2057, with 91% of benefits still payable. For more information, please visit SSA newsroom.

• Document alerts allow you to stay current on legal developments that affect your practice. Find out how to set up your document alerts.

• New and Recently Updated Practical Guidance Content
  • Global Tax Revamp to Require Tricky New Multilateral Treaty
  • IRS Q&As Explain ARPA’s COBRA Premium Subsidy Program

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