New Section 892 and 6038D Regulations...

New Section 892 and 6038D Regulations...

Section 892 Proposed Regulations Clarify Some Sovereign Fund Issues

Section 892 provides that the income of foreign governments received from investments in the United States in investment securities, financial instruments, or interest on deposits in banks in the United States of moneys belonging to such foreign governments is exempt from income tax (i.e. the exemption is only under Subtitle A of the Code).  The term "foreign government" includes only the integral parts or controlled entities of a foreign sovereign...

Foreign sovereign funds often qualify as "controlled entities" and are thus exempted under Section 892.  However, there has been an issue with investments by sovereign funds in partnerships. The exception does not apply to entities that are "controlled commercial entities" which generally means any entity engaged in commercial activities that is controlled by the foreign government. Moreover, under the current temporary regulations, the commercial activities of a partnership are attributable to the partnership's general and LIMITED partners. This created uncertainty for sovereign funds that invest in partnerships because it exposed the fund to a possible taint of all of its activities unless the fund invested in each project through a blocker.  Newly proposed Reg. § 1.892-5 (REG-146537-06, 11/03/2011), however, alleviates this issue by providing for a limited partner exception. Under this new exception, an entity that is not otherwise engaged in commercial activities will not be treated as engaged in commercial activities solely because it holds an interest as a limited partner in a limited partnership...

New Temporary Foreign Asset Reporting Regulations

Here we have another reporting obligation that has often been mentioned on the blog. The recent FATCA Section 6038D requires that U.S. persons report foreign financial assets. I have expressed my frustration on this blog about the multitude of requirements that could befuddle, befall, and hang like a Damocles' sword over the head of an unsuspecting taxpayer.  These requirements are not often well coordinated, are duplicative and frankly are overly-burdensome to many.  This particular requirement, which is manifested in filing Form 8938 could apply to investors in foreign private equity, venture capital and hedge funds, regardless of the fact that such investors may not be subject to an FBAR filing requirement. In an attempt to reduce this burden, the newly issued proposed and temporary regulations under Section 6038D (T.D. 9567 - effective on December 19, 2011) provide specific duplicative reporting relief.  Pursuant to this relief a taxpayer that is otherwise required to file Form 8938 would not have to report the foreign assets if the asset is reported or reflected on a Form 5471, Form 8621, Form 8865, or Form 8891...

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View Ivan Mitev's insights in their entirety on the  Private Equity, Venture Capital and Hedge Fund Taxation site.

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