Tax Considerations for Alternatives

In this world nothing can be said to be certain, except death and taxes. Benjamin Franklin

 Taxes, particularly in the world of alternatives, are complicated and constantly morphing entities that concern both fund managers and investors equally. To be on the wrong side of an investment tax implication is a worry that can erode the best-laid plans in financial planning. Yet the regulatory environment governing the management of these issues is one in which few managers or investors feel comfortable navigating without a team of professional experts. Staying abreast of the tax burden in the alternatives space takes lawyers, accountants, compliance specialists, and sophisticated administrators to corral the necessary information and reporting requirements.

Managers and investors will increasingly look to their advisers and strategic partners to help guide them in maintaining compliance with these new requirements. From interpreting the law to capturing the right information and filing the appropriate forms on deadline, this coordinated effort will require centralized data capture, better reporting capabilities, and client customization. According to Schulte Roth & Zabel LLP, one of the alternative industry’s leading law firm specialists, this effort is getting bigger and will keep growing. In Schulte’s summary report of their 24th Annual Private Investment Funds Seminar, just a few of the issues concerning alternatives in 2015 include the following:

FATCA Is Here And Now

  • As of Jan. 1, 2015, the U.S. Foreign Account Tax Compliance Act (“FATCA”) is fully in effect. It requires U.S. withholding agents making payments of U.S.-source FDAP income to non-U.S. entities to withhold 30 percent under U.S. FATCA, unless the withholding agents can reliably associate the payment with a valid tax form that certifies the FATCA-compliant status of the non-U.S. entity receiving the payment. The United Kingdom has also adopted its own form of FATCA which has its first reporting requirement in 2016. And more US FATCA- like programs are expected to be adopted by more countries as a result of the Common Reporting Standard model released by the Organization for Economic Co-operation and Development back in 2014.

MLPs Can Be Subject To Income Tax

  • To the extent a master limited partnership (“MLP”) is engaged in a U.S. trade or business, an offshore fund that holds interests in such MLP will be deemed to be engaged in such U.S. trade or business, and income and gain passed through from the MLP would be subject to U.S. income and branch profits tax. According to Rev. Rul. 91-32, non-U.S. partners’ gain from disposition of interest in a partnership engaged in a U.S. trade or business is treated as effectively connected income. Also, owning more than 5 percent of an MLP can also result in Foreign Investment in Real Property. Tax Act (“FIRPTA”) gain if the MLP owns U.S. real property interests. And finally, there are state and local tax filing obligations for investors in onshore funds due to business operations of MLPs in those states and localities.

Withholding Taxes on Section 305(c) Deemed Dividends on Convertible Debt Section 305(c) provides that an increase in the conversion ratio with respect to convertible debt can be considered a deemed dividend and may be taxable.  Investment funds that own convertible debt need to be aware that withholding may need to be done with respect to any foreign investors’ share of these deemed dividends.  In many cases, the IRS is seeing that this has been overlooked.

Conifer Financial Services has the requisite skills and expertise to deliver accurate and timely reporting to alternatives managers. As a leading asset services firm with over 27 years in the industry, the firm has experience with all facets of reporting and regulatory compliance, and provides value and support to managers and investors alike. With a premier cloud-based technology platform and in-house expertise, Conifer is able to offer an outstanding range of global administration, performance measurement and document management services. From managing special allocations to providing comprehensive document management, Conifer Financial Services offers the expertise necessary for private equity fund managers to build confidence and trust in their offered services.

Some of the most important services investment companies and hedge fund managers can receive from Conifer include:

  • Daily security and cash reconciliation across multiple custodians
  • Trade break reporting and resolution
  • Bank account reconciliations
  • Monthly investor statements
  • Preparation of GAAP and IFRS-compliant annual financial statements following respective jurisdictions’ rules and reporting requirements
  • Asset and price verification
  • Calculate net asset values
  • Investor communications and reporting
  • Cloud-based reporting and investor portal
  • Extensive performance, exposure and liquidity reporting
  • Preparation of investor tax reporting (e.g. Form 1099s, tax estimates, Schedule K-1s and PFIC statements)
  • Preparation of federal and state income tax returns
  • Responding to IRS and state tax authority inquiries
  • Ad-hoc tax consulting services