Congress Introduces Legislation That Would Tax Offshore Hedge Funds as U.S. Corporations

On March 2, 2009, Senator Carl Levin (D-Michigan) introduced the Stop Tax Haven Abuse Bill of 2009 (the Bill).  A similar bill was introduced in the Senate in 2007 (co-sponsored by then-Senator Barack Obama), but was not acted upon.  The Bill, like its 2007 predecessor, contains numerous provisions generally intended to prevent U.S. taxpayers from holding assets in accounts of financial institutions located in so-called tax havens without disclosing the existence of those accounts to the Internal Revenue Service.  The Bill, however, also contains an onerous provision (Section 103) which would cause hedge funds incorporated outside the United States, but managed from within the United States, to become subject to full U.S. corporate income tax.  In a guest article, Jeremy Naylor, a Partner at White & Case, explains the mechanics of the bill, its potential effect on offshore hedge funds and why Senator Levin’s rationale in proposing the Bill may be at odds with the reality of the current tax law as applied to hedge funds.

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