BAILOUT BILL STOPS DEFERRAL OF OFFSHORE FUND FEE INCOME
The Economic Stabilization Act (aka the Bailout Bill) includes provisions that significantly limit offshore fund sponsors from deferring fee income for US tax purposes. A fund manager must pay US tax on current fee income if “there is no substantial risk of forfeiture.” A substantial risk of forfeiture would apply if compensation is conditioned on the “future performance of substantial services.” The legislation makes an exception “if compensation is determined solely by reference to the amount of gain recognized on the disposition of an investment asset.” The fund sponsor would not need to include the fees in gross income if the offshore entity is “subject to a comprehensive foreign income tax,” meaning it is not located in a tax haven jurisdiction. The legislation authorizes the IRS to adopt implementing regulations.
OUR TAKE: This change significantly reduces the benefits of structuring funds as offshore vehicles. It will be interesting to see what IRS regulations will say about the treatment of performance fees and GP allocations.