Tax Advantages Of The Offshore Hedge Fund
The offshore hedge fund offers securities primarily to non-U.S. investors and to U.S. tax-exempt investors. Money managers who have significant potential investors outside the United States typically create offshore hedge funds. With regard to investors, U.S. taxpayers generally prefer to be in a domestically organized vehicle that is a flow-through tax entity such as a limited partnership or limited liability corporation.
But because of the tax and legal implications of these offshore hedge funds, make sure you have advisement from tax law experts, tax treaties and offshore administration.
What makes this type of hedge fund so attractive is that in a flow-through entity, the entity itself pays no taxes but instead, the profits flow through to the investors who are individually responsible for their own tax liability. Also the participant is exempt from U.S. Securities & Exchange Commission (SEC) regulations, U.S. income or withholding taxes on distributions received from the fund or to U.S. estate taxes on fund shares. Since registration is other than in the United States or with the SEC, they offer privacy benefits too.
So the bottom line in creating this type of hedge fund is that gains are either untaxed or very lightly taxed in the country where they are created. Additionally, the regulatory regime in these countries is less burdensome that that of the high-tax countries where the investors, money managers, and promoters (owners) of the fund are located.
But make sure you have correct structuring to ensure overall success including the management of tax issues, regulatory matters, day-to-day business management, investment strategies, marketing, and back-office operations which will eliminate problems down the road.