Blocks Aren’t Just for Children! Using Blocker Corporations in Private Equity Structuring

Blocker corporations are a common part of private equity (PE) structures and may be an effective tax planning tool because they effectively “block” the flow-through of taxable income at the corporate level for federal, state, and local income tax purposes. They are employed most often when a PE fund invests in a U.S. based business that is taxed as a partnership for U.S. federal income tax purposes. There, taxable income passed through on a Schedule K-1 by a portfolio company generally falls into the category of income “effectively connected with a U.S. trade or business” for foreign investors and unrelated business taxable income (UBTI) for U.S. tax-exempt investors. Foreign investors and others want to avoid this scenario, which can lead to a U.S. income tax filing requirement and a possible U.S. federal income and withholding tax impact.

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  • Business Entities. IRS releases new final versions of the following forms and instructions: Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals), Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities); and Form W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States.
  • Exempt Organizations. IRS sets forth current standards that an LLC must satisfy to receive a determination letter recognizing it as tax-exempt under I.R.C. Section 501(a) and described in I.R.C. Section 501(c)(3). IRS also requests public comments on these standards as well as specific issues relating to tax-exempt status for LLCs. R.S. Notice 2021-56; 2021-45 IRB 1.
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  • IRS Says Reliance on FAQs Will Provide Penalty Defense
  • 3 SALT Cases to Watch at the Supreme Court This Term
  • 136 Jurisdictions Agree to Global Tax Pact, 15% Rate 

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