USA Law and Practice Contributed by: Bjorn Bjerke, Corey Reis and Joshua Kopel, A&O Shearman
ing assets securing such loans or leases could trigger certain state or local sales tax. The sale of loans and other receivables can also trigger certain gains or losses, generally depend - ing on whether the SPE is part of the same tax- consolidated group as the transferor, and may, depending on applicable law and the characteri - sation of the transfer, also have consequences for the transferor’s continued ability to deduct losses from bad loans. Many of these issues are addressed as part of the structuring of the SPE. For example, a single-member LLC is, for federal tax purposes, disregarded (in the absence of the SPE elect - ing any contrary tax treatment) and therefore any transfer of assets from a parent to its wholly owned LLC will not be a taxable event. An SPE that is organised as a partnership or an LLC that has elected to be treated as a partnership for tax purposes would not be subject to entity-level tax, but transfers to a securitisation SPE that is treated as a partnership for tax purposes may have different tax consequences than transfers to a disregarded entity and, as such, it is pos - sible to structure the SPE (and use a multi-SPE structure) so as to optimise the securitisation for the desired tax neutrality. From an investor’s perspective, if an SPE is treated as a partnership for tax purposes, and the notes issued by the SPE to such investor were to be treated as equity for tax purposes, then the noteholder would be taxed individu - ally on its share of the SPE’s income, gain, loss, deductions and credits attributable to the SPE’s ownership of the assets and liabilities of the SPE, without regard to whether there were actual distributions of that income. This, in turn, could affect the amount, timing, character and source of items of income and deductions of
the noteholder, compared to what would be the case if the notes were respected as debt for tax purposes. 7.2 Taxes on Profit An SPE that is subject to entity-level tax, such as a corporation or a partnership that is taxed as a corporation, will potentially incur tax liability for any gains resulting from the sale of finan - cial assets and any income otherwise paid with respect to the financial assets in excess of deductible expenses. Consequently, the SPE is usually structured to avoid entity-level taxation. For example, this can be done by using a tax-transparent organi - sational form or by incorporating the SPE in a jurisdiction that does not impose such taxes. SPEs established as single-member LLCs or Delaware statutory trusts can be readily struc - tured to avoid entity-level tax. Partnerships and entities treated as partnerships are also gener - ally treated as pass-through entities for tax pur - poses, depending on the number of partners, the trading activities in any equity (or securities deemed to be equity for tax purposes) in such partnerships and the availability of relevant safe harbours. A partnership that is deemed to be a publicly traded partnership for US tax purposes could be subject to entity-level tax as if it were a corpora - tion. Applicable tax laws may also cause debt instruments to be characterised as equity inter - ests for purposes of that determination. As such, it is typical to obtain the opinion of counsel relat - ing to the treatment of the notes issued by the SPE as debt for tax purposes and, depending on the activities of the SPE and the level of comfort provided under such opinions, to include addi - tional transfer restrictions on instruments that
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