Investment FundsA substantial part of GTC’s tax practice includes investment fund formation and related services. Our tax and securities expertise enables us to create not only domestic venture funds, but also international funds as well as special investment vehicles such as angel and real estate investment funds. Please contact us to discuss the investment fund formation and tax consulting services that we can provide to you as a potential client of our firm.
We have extensive experience in assisting fund management companies when partners join and leave and in planning for generational shifts. We have structured hedge funds, private equity funds, venture capital funds, real estate funds, and commodities funds and have helped each type of fund to assess the tax consequences of buying, holding, and disposing of their investments in financial instruments, portfolio companies, and other assets.
Structuring the Fund and its Underlying Investments. Proper structuring of a fund requires an analysis of many factors, including the jurisdiction of its investors, location of its portfolio companies and other investments, and taxable or tax-exempt status of the investors. GTC regularly advises on the basic fund structure as well as more sophisticated techniques such as foreign parallel funds, blocker corporations, and feeder funds. We have particular experience in the application of U.S. tax treaties to these situations.
Structuring Tax-Efficient Investments into the Fund. GTC has extensive experience designing investment structures in order to accommodate each type of investor in a given fund so that such investor’s investment in the relevant fund will be the most tax-efficient form of investment possible. The types of investors for whom we provide specialized tax structuring include tax-exempt investors (who are often sensitive to UBTI tax issues), offshore investors (who are usually sensitive to both ECI and FIRPTA tax issues), and onshore individual investors (who generally seek compounded tax deferral on investment gains and also have a strong preference for maximizing the portion of investment returns that will qualify for long-term capital gains tax treatment).
Providing “Tax Shield” Structures for Certain Fund Related Investments. We frequently advise both fund management and specific investors in a fund on sophisticated transactions that can be entered into by a taxpayer in order to enable significant tax deferral and unique tax planning opportunities with respect to assets that would be tax-inefficient investments. This type of tax planning includes each of the strategies summarized below:
- Tax planning strategies using derivatives – Investment funds can often use derivatives and certain financial instruments (such as total return swaps, prepaid forward contracts, and similar derivatives) in order to achieve a more favorable after-tax return on a particular asset class than could otherwise be achieved by owning the underlying asset directly. GTC has significant experience in designing structures that can enable taxpayers to achieve a more desirable tax result through the use of various sophisticated financial instruments.
- Insurance dedicated funds – High net worth individuals can often use products offered by life insurance companies (such as annuities and private placement variable life insurance policies) in order to gain economic exposure to a desired investment that allows tax-deferred wealth accumulation to be achieved in a manner that would not otherwise be available. GTC has substantial experience structuring tax-compliant “insurance dedicated funds” (IDFs) and frequently assists taxpayers with choosing an existing IDF and also helps investment managers in creating a new IDF to offer tax advantaged investment options to clients while maintaining discretionary control to utilize their selected investment strategy.
Drafting of Governing Agreements and PPMs. Funds are usually formed as Delaware limited partnerships or limited liability companies (LLCs). In either case, an organizational document (limited partnership agreement or LLC operating agreement) will establish the rights and obligations of the managers and investors. We offer substantial assistance with proposed terms for such agreements and we review the private placement memorandum (PPM) for legal, tax, and securities compliance.
Tax Compliance Issues and Operational Issues. Our representation does not end with the drafting of the legal documents for investment funds. There are invariably many questions of tax compliance and we remain involved with the fund to assist in those and other operational issues.
FATCA Compliance – the Foreign Account Tax Compliance Act (FATCA) is U.S. tax legislation that was enacted in 2010 that targets US taxpayers who use foreign financial accounts and foreign entities to avoid their US income tax and reporting obligations. The FATCA legislation generally classifies all non-US entities as either “Foreign Financial Institutions” (FFIs) or Non-Financial Foreign Entities (NFFEs). An entity’s FATCA obligations vary depending on whether the entity is an FFI or NFFE and the jurisdiction of the entity. Entities classified as FFIs are generally required to register with the IRS and report certain information about any US owners to the IRS. Entities classified as NFFEs are not required to register with the IRS but are obligated to disclose to their financial institutions on new Form W-8BEN-E the identity of any substantial or controlling US owners. An FFI or NFFE that fails to comply with its FATCA obligations will be subject to a new 30% withholding tax on certain US-source payments (e.g., interest, dividends) and, eventually, the gross proceeds from the sale of US securities. GTC can offer foreign investment funds and funds with foreign entity investors the following services:
- Determinate a foreign entity’s FATCA classification,
- Complete IRS registration of a foreign entity, if appropriate,
- Obtain a “Global Intermediary Identification Number” (GIIN) for a foreign entity,
- Prepare and submit ongoing applicable FATCA reports to the IRS,
- Complete a required Form W-8BEN-E on behalf of a foreign entity in order to ensure that the foreign entity is in compliance with FATCA and that the foreign entity will not be subject to the 30% withholding tax, and
- Prepare an Attorney’s Letter certifying the FATCA compliant status of a foreign entity, if requested by a withholding agent making payments to such an entity.