Problems with and Remedies for Regulations on Partnership Taxation Applied to Private Equity Funds
Asian Tax Journal Vol. 14 No. 5 (2013), pp. 131-154
Abstract
This study evaluates and seeks remedies to improve the current regulations on partnership taxation applied to private equity funds(PEF) as follows；First, interests on overdue contribution and entrance fees for newly admitted investors to PEF should be allocated to existing investors to PEF but the newly admitted investors since the nature of the interests and the fees is the compensations to existing investors. Second, where PEF agreement refers to the distribution of profits, but does not mention the distribution of losses, losses should be allocated in proportion to the profit distribution ratio or loss sharing ratio at liquidation. Third, negative adjustments to basis of PEF equity are required for the allocated amount of withholding taxes to the investors in order to prevent tax avoidance at disposal of PEF interest. Fourth, in case that PEF distributes profits to the PEF manager at interim before the profits are allocated to managers at year－end, temporary double taxation could occur due to the shortfall of equity basis. For a remedy, negative adjustments to equity basis for distribution should be delayed until positive adjustments for profit allocation at year－end. Fifth, Tax Incentives Control Law allows the contribution of services to PEF, whereas the Law of Capital Market and Investment Banking does not allow. Carried interests of PEF managers should be treated as received in capacity as a third party, not a partner in order to prevent tax avoidance.
Keywords
- Private Equity Fund
- Partnership Taxation
- Carried Interest
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