- within Wealth Management, Antitrust/Competition Law and Tax topic(s)
- in United States
- with readers working within the Banking & Credit industries
The California Franchise Tax Board has recently finalized new regulations1 regarding asset management services provided to persons domiciled in California by an asset manager, even if the asset manager has no presence in California.
Under these new California tax regulations, fees earned from "asset management services" will be sourced to California for state income tax purposes in proportion to the fees received from direct investors domiciled in California and from "beneficial owners" domiciled in California, using a look‑through approach. "Beneficial owner" is defined as any person who made an independent decision to invest assets, meaning a person who was not required or committed to do so by contract, by agreement, or by any other arrangement, understanding or relationship except pursuant to law. The term does not include master funds, feeder funds, similar pooling vehicles, a shareholder of a publicly-traded company whose board makes investment decisions, or a participant in a defined benefit plan.
Under these new regulations, "asset management services" means the direct or indirect provision of investment management or fund distribution (including marketing) services, plus administration services (including clerical, accounting, record-keeping, transfer agency, bookkeeping, data processing, custody, internal audit, legal and tax services if provided by the fund investment manager or distributor or their affiliates), to an investment fund. For purposes of these new California tax regulations, "fund" is defined as an investment vehicle that gathers capital from one or more investors.
These new regulations establish that the location of receipt of the benefit of asset management services is determined by the domicile of the investor in the assets, unless the investor holds title to the assets for a beneficial owner, in which case the beneficial owner's domicile controls. An investor's domicile is presumed to be the billing address in the fund's or asset manager's records, unless the fund or asset manager has actual knowledge that the investor's principal place of business is different than the investor's billing address. A beneficial owner's domicile is presumed to be the billing address in the asset manager's records or in the records of the entity receiving the services, unless the asset manager or the entity receiving the services has actual knowledge that the beneficial owner's primary residence or principal place of business is different than the beneficial owner's billing address.
Receipts from asset management services are assigned to California in proportion to the average value of the interests in the assets held by investors or beneficial owners domiciled in California, calculated using the average of the beginning‑of‑year and end‑of‑year percentages. If a fund or asset manager does not know the average value of the interest in the assets held by investors or beneficial owners domiciled in California, receipts are assigned to California based on a reasonable estimation.
If the asset management fees assigned to California exceed the applicable California economic nexus threshold ($757,070 for 2025), the asset manager would be deemed to have California income tax nexus and a related filing obligation irrespective of whether it has any physical presence in California.
These new California tax regulations are effective for taxable years beginning on or after January 1, 2026.
Key Takeaways and Planning Point: These new California tax regulations expand the application of investor-based sourcing to the broader asset management industry (beyond mutual fund service providers, for whom investor-based sourcing was established in 2007).2 In determining the extent to which asset managers have California-source income and, in turn, whether they have California income tax nexus and related filing obligations, asset managers must follow the "look-through" sourcing rules in the finalized regulations for tax years beginning on or after January 1, 2026. Asset managers should consider how these sourcing rules apply to them as they prepare for the upcoming tax year.
Footnotes
1. Cal. Code Regs. ("CCR"), tit. 18, §25136-2.
2. CCR tit. 18, §25137-14.
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