International Tax Issues in the U.S. CLO Debt and Equity Tranches
AUTHORS
Joung Keun Cho,Portfolio Analytics at Simone Investment Managers Internal Auditor to Trinity Asset Management U.S. Tax Advisor to Sellymon.com Assistant Professor of Finance, School of Business, Seokyeong University 1101 Yudam Hall, 124 Seokyeong-ro, Seoul 02713, Korea.
ABSTRACT
CLOs are actively managed and their fee structure aligns the interests of the collateral manager with those of the investors by providing for payment of the significant management fees only after the CLO has paid off its debt and has achieved a specified hurdle rate of return on its equity tranche. The capitalized manager vehicle (CMV) structure facilitates this alignment of interests as well as the additional risk retention requirements. Tax leakage on the cash flowing from the underlying borrowers of the CLO’s leveraged loans through the CLO issuer and into the hands of the noteholders can also occur at the level of payments by the CLO issuer, potentially decreasing their after-tax returns.
KEYWORDS
Collateralized Loan Obligations, Capitalized Manager Vehicle, Effectively Connected Income
REFERENCES
[1] A Practical Guide to U.S. Tax Compliance Issues for Hedge Fund of Funds (2008), Pepper Hamilton LLP.
[2] A.J. Alex Gelinas, Tax Efficient Hedge Fund Structuring in Anticipation of the New 3.8% Surtax on Net Investment Income and Proposals to Limit Individuals’ Tax Deductions (2012), Hedge Fund Law Report, Vol.5, No.10.
[3] A. Mahboob, FATCA and the Fat Cats: Foreign Passthrough Payments and the Blocker Problem (2013), Tax Notes International.
[4] A. T. Maisieres, Hedge Funds, and Taxes: Tax Planning Strategies for the U.S. Investors in Domestic and Offshore Hedge Funds (2003), Chazen Web Journal of International Business, Fall.
[5] D. J. Marples, Taxation of Hedge Fund and Private Equity Managers (2014), Congressional Research Service.
[6] D. Festa, Current Issues Facing CLO Managers (2012), Milbank, Tweed, Hadley & McCloy LLP.
[7] FATCA Registration and Compliance Requirements for Hedge Funds (2014), Schulte Roth & Zabel.
[8] G. B. Cioffi, J. Berman, and D. Sagalyn, CLO 2.0: How Can Hedge Fund Managers Navigate the Practical and Legal Challenges of Establishing and Managing Collateralized Loan Obligations? (2013), Hedge Fund Law Report, Vol.6, No.25.