Stop Tax Haven Abuse Act - Tax Provisions Of Interest To Private Funds And Fund Managers

Last week, Senator Carl Levin (D – Mich.) introduced

the Stop Tax Haven Abuse Act (S. 506) (the

"Bill").1 As the Bill's name implies, it

is aimed at curbing offshore tax haven and tax shelter abuses.

2U.S. based investment managers should take note of the

substance of the Bill, however, since the proposed legislation, if

enacted in its current form, would have a significant impact on the

U.S. federal tax treatment of U.S. managed offshore private funds,

including hedge and private equity funds.

Morrison & Foerster will be following the progress of the

Bill carefully, given that a similar bill introduced by Senator

Levin in 2007 was co-sponsored by then-Senator Barack Obama (D

– Ill.), among others.3 It is also noteworthy

that Treasury Secretary Timothy Geithner's recent testimony

before the Senate Committee on Finance indicated his support for

the Bill.

We discuss below provisions of the Bill that we believe may have

particular relevance to private funds and their investment

managers.

Recharacterization of Certain Offshore Corporations as Domestic

Corporations

Of significant importance is Section 103 of the Bill, which

proposes to treat foreign corporations that either (i) are publicly

traded or (ii) have gross assets of $50 million or more and are

"managed and controlled" in the United States as domestic

corporations for U.S. federal tax purposes, subjecting such

corporations to entity-level U.S. net income taxation. For these

purposes, a foreign corporation is "managed and

controlled" in the United States if substantially all of the

executive officers and senior management of the corporation who

exercise day-to-day responsibility for making strategic, financial

and operational decisions and policies of the corporation are

located primarily in the United States. In addition, for foreign

corporations primarily holding investment assets, such corporations

are treated as managed and controlled in the United States if the

assets of such corporation consist primarily of assets being

managed on behalf of investors, and the decisions about how to

invest the assets are made in the United States.

This provision would affect many offshore hedge funds organized

as corporations that are managed and controlled in the United

States. It could also affect offshore "blocker"

corporations used by private equity funds. Such corporations could

be treated as domestic corporations for U.S. federal tax purposes

subject to entity-level U.S. net income taxation.

Rebuttable Evidentiary Presumptions in Respect of Offshore

Secrecy Jurisdictions

The Bill permits U.S. tax and securities law enforcement to use

certain rebuttable evidentiary presumptions in civil judicial,

administrative tax or securities enforcement proceedings brought

against U.S. persons involved with entities, transactions and

accounts located in "offshore secrecy jurisdictions." The

"offshore secrecy jurisdictions" listed in the Bill

include some of the most common jurisdictions in which private

funds are established.4

Civil Tax Enforcement Proceedings. In a tax proceeding

against a U.S. taxpayer, tax authorities may employ three

evidentiary rebuttable presumptions:

Control. A U.S. taxpayer...