US Hedge Funds Face Threat To Offshore Deferral Schemes

by Carla Johnson, Investors Offshore.com

30 January 2003

According to a Financial Times report published yesterday, hedge fund managers in the United States are set to face a double tax attack from the Internal Revenue Service, which is considering preventing them from deferring taxes on offshore fees, and from leaving pre-tax income to compound over a number of years.

''Normally, when a US company defers income for its employees, the tax burden is passed on to the company's shareholders. But hedge fund managers, managing money offshore for foreign or tax-exempt investors, can defer fees without their clients paying because they are not subject to US tax,' the FT report explained, continuing:

'The right to defer tax is immensely valuable to hedge fund managers because it allows the fees, which can amount to hundreds of millions of dollars in a single year, to compound tax free over many years.'

Speaking to the business daily, an unnamed Dublin-based administrator observed that:

'I'm surprised they have got away with the tax deferrals for so long. My understanding is that they have been looking at a number of hedge fund managers, and how their deferral packages have been put together, and are clamping down on that.'

Recommended