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Alternative Market Briefing

How the Emergency Economic Stabilization Act affects hedge fund managers with offshore funds, changes to deferred taxation of fee income

Friday, October 10, 2008

From Kirsten Bischoff, Opalesque New York: The revenue raising division of the Emergency Economic Stabilization Act of 2008 includes provisions which will take away one of the tax benefits which hedge fund managers organized as cash basis tax payers have been able to utilize through offshore funds. Opalesque spoke with Jean Cogill, Partner at law firm Bingham McCutchen, who explained the implications of:

SEC. 457A. Non Qualified Deferred Compensation from Certain Tax Indifferent Parties ``(a) In General.--Any compensation which is deferred under a nonqualified deferred compensation plan of a nonqualified entity shall be includible in gross income when there is no substantial risk of forfeiture of the rights to such compensation.”

“In essence,” says Cogill, “what Section 457A means for hedge fund managers is that, starting with fees for services provided in 2009, hedge fund managers will no longer be able to defer the receipt, and thus federal taxation, of fees earned for investment management services provided to funds that are ‘tax-indifferent,’ either because they are organized in low or no-tax jurisdictions or because they are partnerships whose investors are predominantly tax-exempt.”

As Cogill explained, until now, fund managers have had the ability to defer taxation of fee income earned from offshore funds. Deferred fees were notionally “reinvested” by the fund (typically in the Fund its......................

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