In this guest post, Brian Sapadin, Executive Director of
GlobeTax, discusses the benefits of tax reclamation and the
opportunities presented by the new Cayman LLC draft
With the highly anticipated Cayman LLC law finally being
published in draft, once unobtainable foreign tax reclaim
entitlements are expected shortly to be in play for eligible
investors whose Cayman fund undertakes a conversion to the new
structure (or, in the case of a new launch, initially structures as
a Cayman LLC). Most U.S. tax-exempts invest through offshore
feeders, traditionally a Cayman limited company (Cayman LTD), to
avoid Unrelated Business Income Tax (UBIT) which can be assessed to
U.S. resident tax-exempt investors for gains made on leverage,
including traditional margin or shorting strategies. Unfortunately,
investors in such vehicles do not have access to double taxation
treaty benefits, since the Cayman vehicle serves as a corporate
blocker and Cayman itself is not party to bilateral tax
In a Cayman LLC — a transparent "look-through"
vehicle — U.S. tax-exempts (and the fund manager) should soon
be able to reap the benefits of tax treaties, for eligible markets
other than the U.S., while still being shielded from UBIT.
Since there is no tax credit for tax-exempts to utilize, any
recovery is pure alpha for the fund. Further, in a number of
markets, tax-exempts are entitled to recover the entire withholding
attributable to their level of participation in the fund.
Similarly, foreign investors whose domiciles allow for treaty
benefits would also have opportunities to lodge claims. One caveat
to note is that the fund manager would need to initiate the process
to lodge claims on behalf of any underlying investors.
With over $1 trillion in hedge fund assets domiciled in the
Cayman Islands, the ability to access treaty benefits, particularly
for U.S. tax-exempts, could have a meaningful impact on fund
performance. If there is wide scale adoption of the new Cayman LLC
structure, we estimate that over $1 billion in annual entitlements
could be unlocked and recovered.
We encourage all offshore investors to discuss the potential
benefits of conversion with their fund managers. ERISA funds, in
particular, are under increasing scrutiny from the U.S. Department
of Labor to act as a fiduciary and recover all available
entitlements. While GlobeTax has focused on the benefits relating
to tax reclamation, there are additional benefits to structuring as
an LLC. Fund managers should discuss with their legal counsel, and
closely weigh the benefits of a pro-active conversion and/or launch
once Cayman LLCs are available.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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