Treasury on December 2 released final regulations under Section 59A (the base erosion and anti-avoidance tax or ‘BEAT’) (the ‘Final Regulations’). Also on December 2, Treasury released additional proposed BEAT regulations (the ‘2019 Proposed Regulations’).
The BEAT seeks to subject both US corporations and non-US corporations doing business within the United States to a minimum tax on base erosion payments made to foreign related parties. Generally, the BEAT is limited to such corporations that have gross proceeds in excess of $500 million is threshold is tested based on the aggregation rules contained in the single employer definition contained in Section 52(a), with certain modifications.
Within the asset and wealth management (AWM) sector, BEAT concerns tend to arise most often in specific circumstances, including payments made by US-headquartered management companies to their foreign parent entities and/or subadvisors, related-party interest payments made by portfolio companies to their foreign parent company, and in US leveraged blocker structures. With the release of the Final Regulations, which generally follow the previously released proposed regulations (the ‘2018 Proposed Regulations’), there are several specific issues that have particular relevance to the AWM industry, which this Insight illustrates in more detail below.
The BEAT may apply where a US corporate asset manager makes service payments to its non-US parent. Such payments may be subject to the BEAT, thus causing a potentially adverse tax impact for foreign-owned US corporate asset managers. Such asset managers that are foreign-owned should review payments made to their foreign parents in order to determine if such payments are subject to the BEAT.
The Final Regulations affirm treating partnerships as aggregates of their partners, thus narrowing the likelihood that asset managers that utilize widely held partnerships have investment structures subject to the BEAT. Nonetheless, asset managers should identify ultimate partners, including RICs, REITs, and Section 892 investors, that may have a high enough ownership percentage to affect the determination of an aggregate group.
Additionally, the BEAT should be considered where a leveraged corporation is utilized as an investment vehicle for holding US assets that generate income effectively connected with a trade or business in the United States. Such corporations often are capitalized via related-party shareholder loans, which potentially could meet the requirements for being subject to the BEAT. Asset managers should review any such leveraged corporate structures that are utilized for investment in such assets.
BEAT can apply in the private equity context where a portfolio company has a foreign parent company and an underlying US corporate subsidiary. As long as more than 50% of the US corporate subsidiary is ultimately owned by the foreign parent company, the $500 million gross receipts test is based upon the aggregated group, which includes the proceeds earned by the foreign parent company. As a result, should the US subsidiary company make any base erosion payments, and otherwise be considered an applicable taxpayer, then such payments may be subject to the BEAT. Asset managers should review their portfolio investments for such aggregated groups and identify potential BEAT payments.