US Hedge Fund Industry is Worried About Tax Implications Under EU Directive

The hedge fund industry in the United States is worried about how managers will be treated under the proposed compensation guidance issued by the U.K. Financial Conduct Authority about the implementation of the E.U. Alternative Investment Fund Managers Directive. The Managed Funds Association is primarily concerned with how tax is dealt with as it pertains to compensation paid to American and other non-EU hedge fund managers.

The Managed Funds Association wrote a letter to the FCA asking that the agency make sure that deferral requirements factor in tax implications for fund manager employees in the jurisdiction of covered employees. The MFA wants remuneration provisions to EU fund managers restricted and not extended to their delegates.

The MFA is worried about practical issues and costs that can occur when the hedge fund regulatory regime and the taxation regime for LLPs and Partnerships in the UK interact. In that country LLPs and Partnerships are treated as tax-transparent, with the result being that partners of partnerships and partnerships of LLPs are taxed to the degree where profits are distributed to them regardless of which one did the distributing. MFA is concerned that because of the deferred remuneration provisions, LLP members and partners could end up with tax liabilities on income that is deferred without corresponding incomes to cover the liabilities.

The association is uneasy about use of the definition of “partner” for a US hedge fund manager that may be owner/managed in the same way as LLPs or UK partnerships but with another legal form. The MFA wants the FCA to modify the definition of partner so that other forms of entity with characteristics that resemble LLPs and partnership are included or that there be a provision anticipating that non-UK fund managers can interpret the relevant provisions and definitions according to the proper legal forms of these fund managers.

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E.U. Alternative Investment Fund Managers Directive

Managed Funds Association

Financial Conduct Authority

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