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Abstract: 

As part of the potential comprehensive tax reform currently being discussed in the United States, legislation has been introduced that would reclassify foreign corporations as U.S. domestic corporations subject to U.S. income tax on their worldwide income if they are “managed and controlled” in the United States. Among the stated targets of this legislation are foreign investment funds whose managers operate and make investment decisions in the United States. Currently, foreign funds classified as corporations for U.S. federal tax purposes provide a tax-efficient investment vehicle for both foreign investors and U.S. tax-exempt investors making investments in the United States. The adoption of a managed-and-controlled standard as currently proposed would upend the fund industry, while having little potential to raise new tax revenues. Among other things, U.S.-managed foreign funds likely would cease to exist in their current form; foreign funds likely would seek non-U.S. based investment advisors; and we would expect to see greatly reduced foreign and U.S. tax-exempt investment in the U.S.

Keywords: domestic corporation; foreign investment funds; effectively connected income; trading safe harbor; International Tax Competitiveness Act of 2013 (H.R. 1555)

Affiliations:  1: Sutherland; 2: Sutherland; 3: Sutherland.