A Study on the Practice of the Taxation forIndirect Investments and its Improvement
Asian Tax Journal Vol. 8 No. 3 (2007), pp. 53-72
Abstract
This paper examines theories and practice of the taxation for indirect investments and discusses its improvement. This paper explores two means of making indirect investments : venture capital partnership and mutual or trust fund. The size and the importance of these investments are growing fast, but the taxation system for these indirect investments is not relevant to the reality. There are in general two theories for the venture capital partnership and mutual or trust funds : conduit theory and entity theory. The conduit theory argues that the partnership or the fund is considered as a conduit, and thus doesn't have any independent right and duty in the taxation. On the other hand, the entity theory argues that the partnership or the fund should be treated as an entity so that it has its own right and duty independently in the taxation. In reality, the taxation for the partnership is based on the conduit theory so that the tax liability falls on partners who eventually receive investment returns. Thus partners are liable for income taxes (individual investors) or corporate taxes (corporate partners) and their income taxes are withheld by the partnership. On the other hand, mutual or trust fund is based on the entity theory so that they are assumed to have legal right and taxation right. However, this does not mean mutual or trust fund is a taxable entity itself. Because of the double-taxation problem, the tax liability passes through mutual or trust fund to individual or corporate investors. This is so called 'conduit qualification' in the entity theory. Once this conduit qualification is satisfied, the fund is not liable to any income earned. Like the conduit theory, the tax passes through the fund to investors. In general, the taxation based on the conduit theory is complex because taxes are imposed according to the origin of income. This makes it difficult for the venture capital partnership to grow and develop in its size. Therefore, the taxation for the mutual or trust fund, this paper argues, must reform its system according to the entity theory and adopt the tax system similar to that of the fund.
Keywords
- Partnership taxation
- mutual or trust fund
- conduit theory
- entity theory
Related Articles
Capital Investment Decision and Tax Factor in the Korean Financial Investment Market
9(4) 29-53
Research for Financial investment and tax risk management
16(4) 35-61
The Research of Taxation on Operating Stage’s Income of Social Security Reserve Pension Fund －Focusing on Pension Provisions Liability and Conduit Theory－
15(3) 105-143
Enforcement of Amendment of the Trust Act and the Improvements Plans of the Trust Taxation Structure
13(3) 421-448
A Study on Foreign Investment Fund’s Tax System －Focusing on Taxation Case of Exchange Gain－
12(4) 9-43