26 February 2016

Obama proposes big changes to US carried interest taxation (again)

While the UK private equity and venture capital industry is still busy with the detail of the proposed changes to the rules governing the taxation of carried interest, and eagerly awaiting the legislation due to be published in this year's Finance Bill, proposals to change the tax rules in the US would, if passed, have a big impact on private equity executive remuneration on the other side of the Atlantic.

President Obama's recent Budget Proposals include two items that could have serious consequences. The first proposal is not new, and has been suggested many times in the past by various lawmakers: to make carried interest receipts subject to tax as ordinary income. In most jurisdictions, carried interest is treated as a return on investments made by the fund and therefore taxed as a capital gain, which is usually at a lower rate than income tax. In the UK, the government's current proposals will mean this capital treatment remains if various tests are met, including if the average holding period of the assets of a fund is more than four years. But the US proposals make no such distinction, and propose to close what they refer to as the "carried interest loophole", meaning full income tax rates would be payable by US tax-paying executives on their carried interest.

The private equity and venture capital industry are quick to point out that capital treatment of carried interest is not the result of a "loophole" or clever tax planning, but merely the result of receiving a share of profits from a capital sale. The UK government's approach is to seek to maintain this treatment for "long term investment", with their stated aim being to ensure receipts from "trading" funds are taxed as income.  But the Obama reform would be much broader.

The second proposal looks at fund manager remuneration earned through fund management companies structured as limited partnerships or "S corporations", which currently does not attract self-employment taxes (the equivalent to social security and Medicare payments usually deducted by employers). It is proposed that a net investment income tax of 3.8% is applied to income through these vehicles to ensure that a tax similar to self-employment tax is paid by recipients of trading income.

It is difficult to tell whether these proposals will be successful, given that several similar attempts to change carried interest taxation have failed in the past, and much could depend on the outcome of the presidential election later this year. In this regard, it is notable that both of the current front-runners for the Presidency have declared themselves in favour of change, but there have been hints that Donald Trump could seek to distinguish between private equity investment funds and trading hedge funds – perhaps in a similar way to that advanced by policy-makers in the UK.

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
Share on LinkedIn Share on Facebook Share on Twitter
    You might also be interested in

    The Singapore Exchange (SGX) has just announced new rules that will enable Special Acquisition Companies (SPAC) listings, effective 3 September 2021.

    03 September 2021

    当前中美关系下高净值个人的税务风险与应对措施

    26 October 2020

    On June 23, 2020, the Chinese Ministry of Finance and State Taxation Administration issued Circulars that contain preferential tax policies for businesses in the Hainan Free Trade Port (Hainan FTP).

    06 August 2020

    General Corporate Notice on Further Improving the Foreign Investment Information Reporting System On June 30, 2020, the Ministry of Commerce of the People’s Republic of China (MOFCOM) and the...

    19 July 2020

    You may also be interested in...

    Legal services for your business

    This site uses cookies to enhance your experience and to help us improve the site. Please see our Privacy Policy for further information. If you continue without changing your settings, we will assume that you are happy to receive these cookies. You can change your cookie settings at any time.

    For more information on which cookies we use then please refer to our Cookie Policy.