By King & Wood Mallesons
The tax treatment of carried interest – the profit share used to reward successful fund managers – has been a hot topic in the private equity and venture capital industry for some time and, as the industry has expanded globally, many jurisdictions have been grappling with the question of how to treat it. Some have laid down specific rules or guidance which, therefore, now sit alongside the commercial and regulatory landscape as a factor influencing fund and fund manager choice of domicile. Governments are clearly well aware of that competitive tension.
In the US, the debate has rumbled on for years; proposals are periodically brought forward to tax carried interest as income, but to date none has ever been enacted. That debate reared its head again on the presidential campaign trail, with both Republican and Democratic nominees criticising the current rules, to the concern of the US private equity and venture capital industry. It may be that the new president takes another look at this issue, but is likely to face as many challenges in getting changes agreed by Congress as their predecessor. On the other hand, there has been a sharper focus in the US (as in the UK) on other aspects of private equity executive compensation, in particular management fee waivers which have been used to fund co-investment.
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