USA Law and Practice Contributed by: Scott Naidech, Basil Godellas, Olga Loy and Beth Kramer, Winston & Strawn
entities that are engaged in brokering the purchase or sale of securities are required to register as broker- dealers under the Exchange Act, and all arrangements with placement agents must also comply with the Marketing Rule (see 4.4 Rules Concerning Market- ing of Alternative Funds ). In addition, the manner in which an investment adviser compensates its employees in connection with US marketing activities can raise broker-dealer concerns. Determining whether a person is a broker-dealer can be fact intensive. One of the most frequently consid - ered facts is whether such employee receives com - pensation directly or indirectly related to transactions in securities of the fund or its portfolio companies. Exchange Act Rule 3a4-1 generally provides that an associated person (or employee) of an issuer who par - ticipates in the sale of the issuer’s securities would not have to register as a broker-dealer if that person at the time of participation: • is not subject to a “statutory disqualification,” as defined in Section 3 (a)(39) of the Exchange Act; • is not compensated by payment of commissions or other remuneration based directly or indirectly on securities transactions; • is not an associated person of a broker or dealer; and • limits its sales activities as set forth in the rule. 4.8 Tax Regime for Investors US federal and state tax consequences depend on the jurisdiction and the tax status of each particular investor in a fund. US Tax-Exempt Investors US tax-exempt investors, such as charitable organi - sations, pension funds, private foundations and indi - vidual retirement accounts, are generally exempt from US federal income taxation except to the extent that they earn UBTI, which can arise when a fund that is a pass-through entity for US federal income tax purpos - es borrows money to fund its investments. In addition, UBTI can arise if a fund is itself engaged in a US trade or business or invests in pass-through portfolio com - panies conducting a US trade or business. Blocker
structures or parallel funds can be utilised to minimise UBTI for US tax-exempt investors. US Taxable Investors A typical US non-corporate investor is subject to US federal income tax at a maximum rate of 37% plus an additional 3.8% tax applicable to the inves - tor’s net investment income. A typical US corporate investor is subject to US federal income tax at a rate of 21%. Various limitations may apply to a US non- corporate investor’s ability to deduct certain losses and expenses. Some of these limitations may depend on the activities of the fund. A US corporate investor is typically not subject to such limitations. Non-US Investors Withholding tax US withholding taxes of 30% generally apply to certain types of non-business income (typically, US-source dividends and certain dividend equivalent income, and limited types of US-source interest income – com - monly referred to as Fixed, Determinable, Annual, or Periodical, or “FDAP” income) allocable by a US fund to non-US investors. Certain exemptions or reduc - tions in tax rate may be available under applicable tax treaties. Foreign governments and sovereign wealth funds are not subject to US withholding tax on certain types of US-source income, including dividends and interest. Capital gain income is also not generally sub - ject to US income or withholding tax unless it is attrib - utable to investments in US real property interests. Income tax Non-US investors can also be subject to US federal income tax on income and gains that are ECI. For example, loan origination by a fund may be treated as generating ECI, which would require a non-US inves - tor to pay US federal income tax and file a US income tax return. Domestic funds with non-US investors are required to make quarterly tax payments to the IRS on account of ECI allocable to non-US investors and must withhold US tax from redemption payments to the extent attributable to ECI-generating investments. Additionally, non-US investors may be required to file tax returns and pay taxes in US states where the fund generates ECI.
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