Tax - Do US funds invest directly in non-US funds?

L

laurentc

Hi.

US citizens/residents cannot really invest in offshore (or European...) funds, as their investments would probably be deemed to be investments in PFIC or CFC (as partnership or corporation) with very complicated accounting/tax issues.


Is it the same things for all US-based funds/commodity pools?

Didn't they find how to invest in funds that are not located in the US?
 
A US investor can invest in a Non-US based fund and receive the same tax treatment as if they were invested in a US based fund. The Non-US fund would need to file an election with the IRS to be treated as a partnership for US tax purposes.

Jeff McKinley
Senex Solutions LLC
Chicago, Illinois
 
JVM, thanks for your new reply.

Agreed, the non-US fund CAN be a partnership (or elect to be treated as a partnership?)

But either it is a partnership dedicated to receive a US investor (US-funds or directly, US residents), either this fund has non-US investors.

And what if this offshore has non-US investors?

They would have their personal details/investments shown to the US IRS, and to US States, as explained on the GTT website: (please see the last 6 paragraphs)

http://www.greencompany.com/HedgeFunds/OfferingDocMasterFeederCompIssues.shtml

So my question remains, in the case of Offshore funds that are not dedicated to show every detail of non-US investors to the IRS.

To me, the only way to do this is to be established as a Corporation, and not as a partnership. Is that correct?


So if the OFFSHORE fund is established as a corporation, is it possible for a US investor to invest in it without any issue?
 
Disclosure of all partners, US and Non-US, to the IRS can be an issue. However, if the US investors want to avoid PFIC reporting issues, the fund will need to be treated as a partnership. You would have the ability to create an additional fund that would accept the non-US investors and have this fund be the investor into the fund that is treated as a partnership.
 
Quote from JVM:

Disclosure of all partners, US and Non-US, to the IRS can be an issue. However, if the US investors want to avoid PFIC reporting issues, the fund will need to be treated as a partnership. You would have the ability to create an additional fund that would accept the non-US investors and have this fund be the investor into the fund that is treated as a partnership.
More...


Agreed, that would be a classic master-feeder structure.
That is of course the best solution for a manager who is able to manage US and non-US based investors.

However, that also means he needs to have 3 funds (1 in ths US as a partnership, 1 offshore as a partnership, and 1 offshore as a corporation).
The US partnership and the Offshore corporations funds would be the only 2 investors in the offshore 'master' fund (partnership), and the manager would trade only this offshore partnership, not the 2 other funds.


But as only very few emerging managers do have enough money to launch these 3 funds, the emerging managers do have to choose between beginning the 'Offshore corporation fund' (seemingly only dedicated to non-US investors and US tax-exempt corporation, because of tax-issues...), or the US partnership (dedicated to US-investors).

What do you think?




Eventually, it seems your answer to the initial question 'Do US funds invest directly in non-US funds?" is:
'NO, no US-funds would invest in non-US funds that are not established as partnerships (except US tax-exempts investors).'

Is that correct?
 
Quote from laurentc:

Agreed, that would be a classic master-feeder structure.
That is of course the best solution for a manager who is able to manage US and non-US based investors.

However, that also means he needs to have 3 funds (1 in ths US as a partnership, 1 offshore as a partnership, and 1 offshore as a corporation).
The US partnership and the Offshore corporations funds would be the only 2 investors in the offshore 'master' fund (partnership), and the manager would trade only this offshore partnership, not the 2 other funds.


But as only very few emerging managers do have enough money to launch these 3 funds, the emerging managers do have to choose between beginning the 'Offshore corporation fund' (seemingly only dedicated to non-US investors and US tax-exempt corporation, because of tax-issues...), or the US partnership (dedicated to US-investors).

What do you think?




Eventually, it seems your answer to the initial question 'Do US funds invest directly in non-US funds?" is:
'NO, no US-funds would invest in non-US funds that are not established as partnerships (except US tax-exempts investors).'

Is that correct?
More...

You could structure either a US LLC/partnership or offshore corporation (treated as a partnership for tax purposes) for all investors. It really depends on the manager's investor base, whether debt is used, etc. There are a lot of factors particular to a manager to consider which is best.

Jeff McKinley
Senex Solutions LLC
Chicago, Illinois
 
Quote from Joetrader:

No. Non US based funds will not accept US investors.
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Exactly, most non-US funds clearly forbid US persons to invest, to keep the confidentiality of the non-US investors.


However, what about the US-tax exempt investors?

The US tax-exempt investors (associations, endowments, schools...) do not have the same issue as the other US investors:
- they do not have to pay taxes on their invesments
- but they could have to pay taxes if they invests in US funds (established as partnerships) and earn income from the use of leverage through these US funds



So the tax-exempt investors which want to invest in Hedge Funds have to invest OFFSHORE, and not in US funds.

What does that mean for the Offshore funds?

If they accept non-US investors and ONLY the tax-exempt investors, would they have to give to the IRS details of all the investors because of the US-tax exempt investors?

Or would they be able to give only a K1 to the tax-exempt investors without having to show to the IRS details of non-US investors?
 
So the tax-exempt investors which want to invest in Hedge Funds have to invest OFFSHORE, and not in US funds.

What does that mean for the Offshore funds?

If they accept non-US investors and ONLY the tax-exempt investors, would they have to give to the IRS details of all the investors because of the US-tax exempt investors?

Or would they be able to give only a K1 to the tax-exempt investors without having to show to the IRS details of non-US investors? [/B][/QUOTE]

The offshore corporation would not have a tax filing requirement in the US. Also, no K-1 would be required as the fund would not need to elect to be treated as a partnership for US tax purposes.
 
Quote from JVM:
The offshore corporation would not have a tax filing requirement in the US. Also, no K-1 would be required as the fund would not need to elect to be treated as a partnership for US tax purposes.
More...


That is really interesting.

So I do not understand why most non-US funds clearly write in their Memorandum/DDocs that no US investors could invest in their fund.

Your answer seems to confirm that any non-US fund should allow the TAX-EXEMPT US investors to invest in their fund, so that they would be able to sold their fund to more potential investors, withou additional "risks" with the US IRS.

What do you think?

Do you think they do not allow the US persons to invest because they do not know the US regulations/taxes issues enough?

Or because allowing tax-exempt could let them involuntarily accept a non-tax exempt investor, that could eventually cause trouble to the fund?
 
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