USA Law and Practice Contributed by: Scott Naidech, Basil Godellas, Olga Loy and Beth Kramer, Winston & Strawn
income (ECI), respectively (see 4.8 Tax Regime for Investors ). 2.5 Loan Origination Permissible, Subject to State Lending Laws Alternative funds are permitted to originate loans, but a state-by-state analysis should be considered to Certain states regulate both commercial and consum - er lending. Because licensing requirements vary from state to state, alternative funds must consider their licensing risk on a state-by-state basis. Although there is no one-size-fits-all analysis, some relevant factors that are typically considered to determine whether evaluate licensing risk. State Licensing Laws • the frequency of the lender’s lending activity (eg, the number of loans made in a 12-month period); • the amount of interest charged on the loan; • the location of the borrower; • the location of the lender/location from where the lender solicits loans; and • the location of the collateral. If licensing is required, a state regulator will generally require the fund to meet certain financial conditions and to submit a licensing application that includes the disclosure of certain minimum information. Although state requirements vary, licensing applications may require disclosure of information regarding the fund’s business plan, financial information, and the fund’s owners, parents, subsidiaries and affiliates. State Usury Laws States generally impose statutory limitations regarding the permissible amount of interest that a lender may charge on a loan. State statutes vary, but the type/ purpose of the loan and the amount of the loan gen - erally are two key factors considered in this analysis. Tax Considerations licensing is required include: • the purpose/type of loan; • the amount of the loan; A fund that originates loans may be treated as being engaged in a US trade or business for US federal income tax purposes. In that case, non-US investors
• file Form PQR with the NFA on a quarterly basis, providing specific information about the manager and the commodity pools that it operates. Managers registered as CTAs must generally: • file Form PR with the NFA within 45 days after the quarters ended in March, June and September; and • file a year-end report within 45 days of the calendar year end. Managers that are registered as CPOs and/or CTAs may rely on certain exemptions to avoid certain of their record-keeping and disclosure requirements for a fund. See 3.3 Regulatory Regime for Managers . 2.4 Tax Regime for Funds No Entity-Level Income Tax on Flow-Through Funds Typically, US-based funds are established as pass- through entities, such as partnerships or limited liabil - ity companies. Generally, a pass-through entity does not pay any entity-level income tax; instead, the ben - eficial owners of such pass-through entity report their share of the pass-through entity’s income, which itself is reported by the pass-through entity to its beneficial owners on an Internal Revenue Service Schedule K-1 (and to the extent the fund has foreign income, on an Internal Revenue Service Schedule K-3), and pay applicable federal income taxes at rates specific to such beneficial owners. However, in certain circum - stances, a fund could be deemed to be a “publicly traded partnership”, subjecting it to federal income tax at the corporate income tax rate unless the fund satisfies an annual 90% “annual income” test. Corporate Income Tax In the unusual circumstance where a US fund is estab - lished as a corporation, such fund is subject to US federal income tax (at a 21% rate) and may be sub - ject to state income tax. Additionally, some funds may elect to use a structure involving a below-the-fund or above-the-fund “blocker corporation” that would pay US federal income tax but may help tax-exempt and non-US investors avoid incurring unrelated busi - ness taxable income (UBTI) or effectively connected
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