In an effort to limit arrangements in which hedge fund managers and other private fund managers receive interests in funds in exchange for waiving management fees (thereby deferring recognition of income and changing its character), tax regulators in the United States recently proposed regulations to treat some investment fund management fee waivers and other payments in lieu of management fees as “disguised payments for services,” with immediate income tax consequences. The U.S. tax authorities are not the only ones trying to strip the disguises from management fees. In the United Kingdom, the Finance Act 2015 introduced disguised management fee rules to combat creative strategies to convert what is in economic substance a management fee – calculated by reference to funds under management and taxed as income at the rate of 45% – to capital gains taxable at 28%. A new bill will also change the taxation of “good carry.” In a guest article, the second in a two-part series, George J. Schutzer and Timothy Jarvis of Squire Patton Boggs outline proposed actions in the U.K. and suggest steps for hedge fund managers and others to take in response to the rules in place and the proposed new rules in the U.S. and the U.K. The first article
described common management fee waiver provisions and explained how the U.S. proposals would limit fee waivers that would be respected for tax purposes. For more on proposals that could affect the taxation of hedge fund managers and their employees, see “U.K. Disguised Fee Rules May Result in Increased U.K. Taxation of Investment Fees to Individuals Affiliated with Hedge Fund Managers (Part Two of Two)
,” Hedge Fund Law Report, Vol. 8, No. 16 (Apr. 23, 2015); and “Potential Impact on U.S. Hedge Fund Managers of the Reform of the U.K. Tax Regime Relating to Partnerships and Limited Liability Partnerships
,” Hedge Fund Law Report, Vol. 7, No. 10 (Mar. 13, 2014).