Practical Tax Considerations for Sovereign Wealth Fund Investments in the United States

Author(s): Rufus Rhoad­es and Alex­ey Man­a­suev Date: Decem­ber 2011

Intro­duc­tion.

This Emerg­ing Issues Analy­sis (EIA) reviews cer­tain tax con­sid­er­a­tions for sov­er­eign wealth funds (gen­er­al­ly referred to as “SWFs”) in view of recent reg­u­la­to­ry devel­op­ments.

Recent­ly (Novem­ber 3, 2011), Trea­sury and the Inter­nal Rev­enue Ser­vice (IRS) have issued pro­posed reg­u­la­tions that addressed var­i­ous issues SWFs have been fac­ing. [Prop. Treas. Reg. §§ 1.892–4 and 1.892–5.] Those reg­u­la­tions part­ly sup­ple­ment and part­ly replace the cur­rent tem­po­rary reg­u­la­tions under IRC sec­tion 892 that have been in place since 2002 (and ear­li­er).

Impor­tant­ly, the pro­posed reg­u­la­tions offer a few plan­ning oppor­tu­ni­ties for SWFs and pro­vide long await­ed guid­ance on cer­tain areas that have been neglect­ed by the gov­ern­ment since 1988 and 2002, when the tem­po­rary reg­u­la­tions, cur­rent­ly in effect, were pro­mul­gat­ed.

Notwith­stand­ing the new reg­u­la­tions’ sta­tus as pro­posed (pos­si­bly sub­ject to change before being final­ized), the pre­am­ble explic­it­ly allows tax­pay­ers to rely on pro­vi­sions con­tained in those reg­u­la­tions, effec­tive­ly trump­ing the tem­po­rary reg­u­la­tions to the extent there is any con­flict.

A Brief Back­ground.

Sov­er­eign wealth fund invest­ment in the Unit­ed States has more than quadru­pled over the last decade. More recent­ly, SWFs have been espe­cial­ly active dur­ing the eco­nom­ic down­turn by inject­ing funds in U.S. finan­cial insti­tu­tions and con­tin­u­al­ly expand­ing their invest­ment port­fo­lios to equi­ty invest­ments. Some esti­mate that SWFs’ invest­ments in the Unit­ed States will reach over $15 tril­lion by 2015. Sov­er­eign wealth fund invest­ments came and they came for good; they see appeal­ing oppor­tu­ni­ties to earn a healthy return on U.S. invest­ments with­out being sub­ject to U.S. tax. But, along with oppor­tu­ni­ties, SWFs have been fac­ing sig­nif­i­cant uncer­tain­ties under the cur­rent tax regime, in many cas­es lead­ing to traps for the unwary or unnec­es­sary admin­is­tra­tive bur­dens for knowl­edge­able tax­pay­ers.

The recent­ly issued pro­posed reg­u­la­tions con­tain favor­able pro­vi­sions for SWFs and address some of the press­ing issues faced by SWFs, but, at the same time, the reg­u­la­tions fall short in address­ing var­i­ous impor­tant con­cerns.

To request a full arti­cle please con­tact us.

Con­tact Us