53 terms
Blocker
Blocker corporation
Funds are partnerships, and partnerships pass everything through. That's a problem for two kinds of investor: foreign investors, who don't want ECI and a US tax return, and US tax-exempts (endowments, foundations, pensions), who don't want UBTI.
The fix is a blocker: usually a Delaware (sometimes offshore) corporation that invests in the fund on the investor's behalf. The blocker files the US return and pays 21% corporate tax. What comes out of it is a dividend or a share sale — clean, passive income from the investor's point of view. The trade-off is that extra 21% layer, so tax teams spend a lot of time making blockers efficient (see thin cap).
Worked example
A foreign family office puts money into a buyout fund through a blocker. The blocker's share of profits is $100. It pays $21 of US corporate tax, leaving $79. If that $79 is paid out as a dividend, 30% withholding could apply (less under a treaty). That's why funds usually exit by selling the blocker's shares — a foreign seller's gain on US stock is generally not taxed (unless the blocker is a USRPHC).
Where you'll see it: Fund diagrams with a box labelled “Blocker” or “Corp Feeder”, side letters, and the blocker's own Form 1120.
Capitalisation vs depreciation
Basis · placed in service · 27.5 / 39 years
Capitalisation: while you build. To capitalise a cost is to add it to the asset's tax cost (its “basis”) instead of deducting it this year. When a real estate fund develops a building, almost everything it spends during construction is capitalised: the hard costs, the fees and, under the uniform capitalisation rules, construction-period interest and property taxes too. No deduction yet. Land is never depreciated, so its cost sits in basis until the property is sold.
Depreciation: once it's ready to rent. Depreciation starts when the building is placed in service: finished and ready and available to rent, even if the first tenant hasn't moved in. From then on the capitalised cost comes back as a deduction, a little each year. Ordinary repairs are deducted as they happen, but improvements are capitalised and depreciated in their own right. A cost segregation study can carve out shorter-lived parts (fixtures, parking lots) that depreciate faster and can qualify for bonus depreciation. In a fund these deductions flow out on the K-1, often showing a tax loss while the property pays cash.
Residential vs commercial: 27.5 or 39 years. A residential rental building, where at least 80% of the rent comes from homes, is depreciated straight-line over 27.5 years. Offices, shops, warehouses and other commercial buildings take 39 years. Hotels count as commercial, because guests stay for short periods. An easy way to remember which is which: people live in an apartment around the clock, but only work in an office for part of the day, so the home wears out faster and gets the shorter life. That is a memory aid, not the legal test; the code simply sets the two periods.
Worked example
A real estate fund buys land for $10m and builds an apartment block for $40m, paying $3m of construction-loan interest and $0.5m of property tax along the way. None of that is deducted during the build. The building's basis is $43.5m; the $10m of land is not depreciable. When the block is finished and ready to let, it is placed in service and the fund deducts about $1.58m a year ($43.5m ÷ 27.5), slightly less in the first year. Interest after that date is generally deductible as it accrues, subject to the Section 163(j) limit. Illustrative round numbers.
Where you'll see it: Development budgets and cost-to-complete reports, fixed asset registers, cost segregation studies, and the depreciation lines on real estate fund K-1s.
Carried interest
Carry · Section 1061
Carry is the bottom step of the waterfall. Because the manager holds a profits interest in the partnership, its share keeps the character of the fund's income — so a gain on a portfolio company sale is capital gain to the GP too.
Since 2018, Section 1061 says carry only gets long-term rates if the asset was held for more than three years (rather than the usual one). Sell after two years and the GP's share is short-term gain, taxed like ordinary income. That's why credit and shorter-hold strategies care much more about this rule than buyout funds do.
Worked example
A fund sells a company after 2.5 years for a $50m gain; the GP's carry is $10m. Under Section 1061 that $10m is short-term gain — roughly $4.1m of federal tax (37% + 3.8%) instead of about $2.4m at long-term rates (20% + 3.8%). Simplified: assumes the top bracket and that the 3.8% net investment income tax applies.
Where you'll see it: Carry vesting schedules, GP K-1s with Section 1061 worksheets, and hold-period planning before exits.
CFC
Controlled foreign corporation
Two tests, stacked. First, who counts: a US shareholder is a US person owning 10% or more (by vote or value). Second, the company is a CFC if those US shareholders together own more than 50%. Small US investors under 10% don't count towards the 50% and aren't taxed under these rules.
Once a company is a CFC, its US shareholders include certain income annually — passive “Subpart F” income and NCTI. For funds this matters because a US fund partnership is looked through: the test is applied to each partner's indirect stake, so a big US LP can be a US shareholder while the small ones aren't.
Worked example
A US buyout fund buys 70% of a UK company. The fund's two largest US LPs each own about 15% of the fund — about 10.5% of the company indirectly — so they are US shareholders. The company is a CFC, and those two LPs pick up NCTI each year. Smaller LPs don't.
Where you'll see it: Form 5471, structuring of non-US portfolio companies, and the CFC sections of a K-3.
Full explainer: Section 987 currency gain or loss and the CFC exemption election →
Check-the-box elections
Entity classification · Form 8832 · per se corporations
Distribution waterfall
Pref · catch-up · carry split
Every fund's cash goes down the same staircase. 1. Return of capital to the LPs. 2. Preferred return (“pref” or “hurdle”), often 8% a year, also to the LPs. 3. GP catch-up: the manager takes most or all of the next dollars until it has its 20% of total profit. 4. Carried interest split: everything after that goes 80/20.
It matters for tax because a partnership allocates taxable income to match who gets the cash — often using “targeted” capital accounts. When the waterfall and the tax allocations don't line up, LPs get K-1s that don't match their distributions and everyone ends up in the tax team's inbox. European waterfalls run on the whole fund; American ones deal by deal, paying carry earlier.
Worked example
LPs invest $100; after one year the fund has $160 to distribute. LPs take $100 back, then an $8 pref. The GP catches up $2 (so it has 20% of the $10 distributed as profit so far). The last $50 splits $40/$10. Totals: LPs $148, GP $12 — exactly 20% of the $60 profit.
Where you'll see it: LPA Article on distributions, waterfall models, and capital account reconciliations behind every K-1.
Domestically controlled REIT
DC REIT · DCQIE
Stock in a REIT that's mostly US real estate would normally be a FIRPTA asset. But if foreign persons own less than 50% of the REIT's value — measured throughout the shorter of the last five years or its life — it's domestically controlled, and selling its shares isn't subject to FIRPTA.
The fight is over who counts as foreign. You have to look through some owners to find the real investors behind them, and Treasury tightened those look-through rules in 2024 for certain domestic corporations owned by foreigners. Fund tax teams track the REIT's ownership mix continuously because one large foreign subscription can tip it over 50% and lose the exemption for years.
Worked example
A fund's private REIT is 45% foreign-owned. The fund sells the REIT's shares to a buyer for a $30m gain. Because it's domestically controlled, the foreign investors' share of that gain isn't FIRPTA income — no 15% withholding on the price, and no US return for it.
Where you'll see it: Ownership tracking spreadsheets, investor transfer restrictions in REIT charters, and exit structuring memos.
DRE (disregarded entity)
FDE · foreign disregarded entity · check-the-box
What it is. "DRE" is practitioner shorthand for a disregarded entity. A single-member US LLC is disregarded by default, and many foreign entities can elect to be disregarded on Form 8832 (the check-the-box election), although some foreign company types are always corporations. The IRS forms call a foreign one an FDE (foreign disregarded entity), and its owner for tax purposes its tax owner.
Why it matters. Ignored for income tax doesn't mean ignored for reporting. A US owner of an FDE files Form 8858 for it. If a CFC or a foreign partnership owns the FDE, its figures go into that entity's 5471 or 8865, and the US filers also file an 8858. And an entity with one owner can't be a partnership, so a single-owner foreign vehicle is an 8858 question, not an 8865 one.
Worked example
A US company sets up a Luxembourg S.à r.l. and checks the box to disregard it. The S.à r.l.'s income goes straight onto the US company's own return, and the company attaches a Form 8858 for it every year.
Where you'll see it: Structuring cross-border holding companies, check-the-box elections, and working out whether a vehicle needs an 8858, 8865 or 5471.
Full explainer: check-the-box elections and Form 8832 →
Full explainer: Form 8858 and foreign disregarded entities →
Full explainer: Section 987 currency gain or loss on foreign branches and DREs →
ECI
Effectively connected income
The US splits a foreign investor's US income into two buckets. ECI is the “you're running a business here” bucket: profits from an operating business, or from a fund that is itself treated as trading or lending in the US. Because a fund is usually a partnership, a foreign investor is treated as doing whatever the fund does — so if the fund is in a US business, so is every foreign LP.
ECI is taxed on a net basis at normal US rates (up to 37% for individuals, 21% for corporations), the foreign investor has to file a US return, and a foreign corporation can also owe a 30% branch profits tax on top. That filing obligation is the thing most foreign LPs want to avoid at almost any cost.
Worked example
A German family office owns 10% of a US fund. The fund owns an LLC that runs a chain of car washes and earns $5m of profit. The family office's share — $500k — is ECI. The fund must withhold tax on it up front (see Section 1446), and the family office files a US return to settle up.
Where you'll see it: Fund docs promising to “use reasonable efforts to avoid ECI”, blocker structures, and Forms 8804/8805 at year-end.
FDAP
Fixed, determinable, annual or periodical income
FDAP is the other bucket (the first is ECI). It covers passive payments: dividends, interest, rents, royalties, and similar recurring income. Instead of filing a return, the foreign investor gets taxed by withholding: whoever pays the money holds back 30% of the gross amount and sends it to the IRS. No deductions, no return — just a flat haircut.
Tax treaties often cut the 30% (for example to 15% or 0% on dividends, depending on the country and the investor), and big chunks of interest escape entirely through the portfolio interest exemption. Capital gains from selling stock are generally not FDAP for a foreign investor — which is why exits matter so much.
Worked example
A Cayman feeder fund owns shares in a US company that pays it a $1,000,000 dividend. The paying agent withholds $300,000 and the fund receives $700,000. Cayman has no treaty with the US, so there is nothing to claim back.
Where you'll see it: W-8BEN / W-8BEN-E forms, Form 1042-S at year-end, and every investor-onboarding questionnaire.
FDDEI
Foreign-derived deduction eligible income · formerly FDII
FDDEI is the carrot to NCTI's stick. NCTI taxes profits US companies park in foreign subsidiaries; FDDEI rewards them for keeping the business in the US and exporting from here. From 2018 to 2025 it was called FDII (“foreign-derived intangible income”). The 2025 tax law renamed it for tax years starting in 2026 and changed the formula.
The idea: work out how much of a US corporation's income comes from sales, licences or services to foreign customers for use abroad, and give it a 33.34% deduction — so it's taxed at roughly 14% (21% × 66.66%). Key 2026 changes: the old carve-out for a 10% return on tangible assets (QBAI) is gone, so more income qualifies; interest and R&D costs no longer have to be allocated against it; and gains from selling intellectual property or depreciable property no longer count. Only US C corporations can claim it — so in fund land it matters at the portfolio-company level, not to the fund or its LPs directly.
Worked example
A US software company owned by a buyout fund has $1,000 of eligible profit, 40% from licences to customers outside the US. FDDEI is $400; the deduction is 33.34% of that, about $133. Tax falls from $210 (21% × $1,000) to about $182. Simplified: the real calculation runs through eligible income ratios, documentation of foreign use, and the taxable-income limit in Section 250.
Where you'll see it: Portfolio company tax provisions, Form 8993, and diligence on whether a target's export claims are documented.
FIRPTA
Foreign Investment in Real Property Tax Act · USRPI · USRPHC
Normally a foreign investor's capital gain on US assets isn't taxed. Real estate is the big exception. FIRPTA treats gain from a US real property interest (USRPI) as ECI. A USRPI includes land and buildings and also stock in a US real property holding corporation (USRPHC) — broadly, a US corporation whose US real estate is at least 50% of its real estate plus business assets.
To make sure the tax is paid, the buyer withholds 15% of the gross price and sends it to the IRS. The seller then files a return to pay tax on the actual gain and claim back any excess. Key exceptions: qualified foreign pension funds, small stakes in listed companies, and selling shares in a domestically controlled REIT.
Worked example
A foreign fund sells a US warehouse for $50m that it bought for $40m. The buyer withholds $7.5m. The fund's actual US tax on the $10m gain is about $2.1m at 21% (plus possibly branch profits tax, depending on structure), so it files a return and claims the difference back.
Where you'll see it: Closing statements, FIRPTA certificates and Forms 8288/8288-A, plus every real estate fund's exit plan.
Form 1042 and 1042-S
Withholding on US income paid to foreign persons
What they are. Form 1042 is the withholding agent's annual tax return for the 30% (or treaty-reduced) tax on FDAP income, such as dividends, rents and some interest, paid to foreign persons. Form 1042-S is the slip each foreign recipient gets, showing what was paid and withheld, a bit like a W-2 for foreign investors.
Who has to file. Any withholding agent: anyone who pays US-source FDAP to a foreign person. In funds that's often the fund, its administrator or the paying bank. They must file even if no tax was withheld because a treaty or the portfolio interest exemption applied, which is why the payee's W-8BEN-E matters.
When they're due. March 15 after the calendar year, for both the 1042 and the 1042-S (to the IRS and to recipients). The tax itself has to be deposited during the year, not with the return.
Worked example
A US REIT pays a $1m dividend to a UK pension fund that qualifies for a reduced treaty rate. The REIT withholds at the treaty rate and, by March 15, files Form 1042 and sends the pension fund a Form 1042-S showing the dividend and the tax withheld.
Where you'll see it: Year-end investor reporting, treaty claims, and checking that every foreign LP's W-8 is on file and current.
Form 1065
U.S. Return of Partnership Income
What it is. The yearly information return for anything taxed as a partnership: most PE, credit and real estate funds, their general partners, and LLCs with two or more owners that haven't elected to be a corporation. It shows the fund's total income, deductions and credits, then splits them among the partners on a Schedule K-1 each (plus K-2/K-3 for international items).
Who has to file. Every domestic partnership, every year it exists, even in a year with no income. A foreign partnership generally has to file too if it has US-source income or income from a US business (ECI), with limited exceptions for small amounts of passive income.
When it's due. The 15th day of the 3rd month after year-end, so March 15 for a calendar-year fund. Form 7004 gives an automatic six-month extension to September 15, which most funds use. Filing late triggers a penalty for each partner, for each month (up to 12 months), so a big fund's late return gets expensive fast.
Worked example
A real estate fund with 120 LPs closes its books on December 31. It files Form 7004 in March, then files Form 1065 with 120 K-1s in September. Each LP reports its share of rental income and depreciation on its own return.
Where you'll see it: K-1 season: estimates to LPs in Q1, the extension in March, final 1065 and K-1s by September.
Full explainer: Schedule M-1 and M-3 book-to-tax adjustments →
Form 1120
U.S. Corporation Income Tax Return
What it is. The income tax return for a domestic C corporation. Unlike a partnership, the corporation pays the tax itself, at 21% federally. In fund land you meet it through blocker corporations, portfolio companies, and US corporate subsidiaries of foreign groups.
Who has to file. Every domestic corporation, whether or not it owes tax or had any income that year, unless it is a specific type with its own form (a REIT files 1120-REIT, an S corporation 1120-S, a foreign corporation 1120-F).
When it's due. The 15th day of the 4th month after year-end, so April 15 for a calendar-year company, with an automatic six-month extension to October 15 via Form 7004. The extension is for the paperwork only: tax still has to be paid by the original date.
Worked example
A Delaware blocker receives $10m of income from a fund's K-1. It files Form 1120, pays about $2.1m of federal tax, and later pays a dividend to its foreign owner out of what is left.
Where you'll see it: Blocker compliance, portfolio-company tax provisions, and due diligence on a target's filing history.
Full explainer: Schedule M-1 and M-3 book-to-tax adjustments →
Form 1120-F
U.S. Income Tax Return of a Foreign Corporation
What it is. The foreign-corporation version of the 1120. It reports effectively connected income (taxed at regular corporate rates, plus a possible 30% branch profits tax) and any US-source passive income where the right tax wasn't withheld.
Who has to file. A foreign corporation engaged in a US trade or business at any time in the year, even if it has no ECI or no US income at all, or one with US-source income that wasn't fully settled by withholding. Missing it can cost the corporation its deductions, so the tax is then figured on gross income. Credit funds watch this closely, because lending activity in the US can create a US business.
When it's due. With a US office: the 15th day of the 4th month after year-end (April 15). Without one: the 15th day of the 6th month (June 15). Form 7004 extends either by six months.
Worked example
A Cayman feeder that is treated as lending in the US receives $4m of interest that counts as ECI. With no US office, it files Form 1120-F by June 15, claiming credit for any tax the fund already withheld on its behalf.
Where you'll see it: Credit fund structuring ("is this a US trade or business?"), treaty claims, and protective filings.
Form 5471
Information Return of U.S. Persons With Respect to Certain Foreign Corporations
What it is. An information return attached to the US owner's own tax return, describing a foreign corporation: its shareholders, income, balance sheet and dealings with related parties. It feeds the CFC and NCTI rules.
Who has to file. US persons in five categories, roughly: US shareholders of a CFC or certain other foreign corporations; US officers or directors when a US person crosses 10% ownership; US persons who acquire or dispose of a 10% stake; and US persons who control (own more than 50% of) the corporation. A US fund that owns a foreign portfolio company is a classic filer.
When it's due. With the filer's income tax return, including extensions (so for a fund, with its Form 1065). The penalty starts at $10,000 per form per year, with more for continued failure, and the IRS's time limit to audit the whole return can stay open until it's filed.
Worked example
A US PE fund buys 80% of a German manufacturer. The German company is now a CFC, so the fund attaches a Form 5471 for it to the fund's 1065 every year, and the US partners get the CFC detail on their K-3s.
Where you'll see it: Acquisitions of non-US portfolio companies, K-3 preparation, and "did the target ever file its 5471s?" diligence.
Full explainer: the five filer categories and their schedules →
Form 8621
Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
What it is. A form attached to the US owner's return for each PFIC held directly or indirectly: foreign funds, offshore feeders and cash-rich foreign holding companies. It reports distributions, gains and annual income, and carries the elections that decide how the PFIC is taxed.
Who has to file. Any US shareholder, at any percentage, in a year with a distribution, a sale, a QEF or mark-to-market inclusion, or an election. The annual report (Part I) is also required unless the holding is a default-regime fund worth $25,000 or less in total ($50,000 joint) with no distribution or gain. Holdings inside an IRA or qualified plan don't count.
When it's due. With the filer's income tax return, including extensions. There is no stand-alone dollar penalty, but a missing 8621 keeps the IRS's time to audit the whole return open, and missing the first year usually means missing the QEF election.
Worked example
A US LP holds shares in a Cayman credit fund organised as a corporation. The fund sends a PFIC Annual Information Statement, so in year one the LP files Form 8621 with a QEF election and reports its share of the fund's income each year, keeping capital gains as capital gains.
Where you'll see it: Investor tax packages for offshore funds, PFIC Annual Information Statements, and expat portfolios holding non-US funds.
Form 8804 and 8805
Section 1446 partnership withholding returns
What they are. When a partnership earns ECI, it has to pay tax up front on the share belonging to foreign partners (see Section 1446). Form 8804 is the partnership's annual return for that tax; Form 8805 is the statement each foreign partner gets so it can claim the credit on its own US return.
Who has to file. Any partnership, US or foreign, that has ECI allocable to at least one foreign partner, even if a loss means no tax is actually due for that partner.
When they're due. The 15th day of the 3rd month after year-end (March 15 for a calendar year), extendable by six months. The tax itself is paid in quarterly installments during the year using Form 8813.
Worked example
A US credit fund has $20m of ECI, 25% allocable to foreign LPs. It pays Section 1446 tax on their $5m share in quarterly installments, then files Form 8804 and sends each foreign LP an 8805 by March 15 (or September 15 extended).
Where you'll see it: Quarterly 1446 estimates, year-end foreign partner packages, and LP questions about "why was tax withheld from my distribution?"
Form 8822-B
Change of address or responsible party for a business
Form 8832
Entity Classification Election · the check-the-box election
What it is. Under the check-the-box rules, a business entity that is not automatically a corporation (a per se corporation, such as a US corporation or a foreign public company form named in the regulations) can choose to be taxed as a corporation, a partnership or, if it has one owner, a disregarded entity. Form 8832 is how it makes that choice. An entity that never files one gets a default: a US LLC is a partnership or disregarded entity, while a foreign entity whose owners all have limited liability, such as a Luxembourg S.à r.l. or a Dutch B.V., is a corporation.
Who files. The entity, signed by every owner or by an officer, manager or member authorised to make the election. It goes to the IRS service center in Kansas City or Ogden (foreign entities file in Ogden), and a copy is attached to the entity's federal return for the year of the election, or to its owners' returns if the entity files none.
When. There is no annual deadline. The election can take effect no more than 75 days before and no more than 12 months after the date it is filed. After an entity changes its classification by election, it generally cannot change again for 60 months, and the change is treated as deemed transactions, such as a deemed liquidation, that can trigger tax. A missed deadline can often be fixed under Rev. Proc. 2009-41 within 3 years and 75 days.
Worked example
A US real estate fund forms a Luxembourg S.à r.l. on 1 March to buy an office building, and it is the only owner. By default the S.à r.l. would be a corporation, because all its owners have limited liability. The fund files Form 8832 by 15 May, within 75 days, electing disregarded status from 1 March. Because the election takes effect on the day the S.à r.l. is formed, it is an initial classification: no deemed liquidation and no 60-month clock. The fund then reports the S.à r.l. on Form 8858.
Where you'll see it: Setting up blockers and foreign holding companies, planning before an exit, and checking a vehicle's classification before deciding between a 5471, 8865 or 8858.
Form 8858
Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches
What it is. An information return covering a foreign disregarded entity (FDE), such as a foreign LLC or Luxembourg S.à r.l. that has checked the box to be ignored, or a foreign branch (a business run abroad without a separate entity). Because the US treats the FDE's income as its owner's, the form shows what's inside it.
Who has to file. US persons that are the tax owner of an FDE or operate a foreign branch, directly or through other entities, and US persons that must file a 5471 or 8865 for a foreign corporation or partnership that itself owns an FDE or branch. Real estate and credit funds that hold non-US assets through checked-the-box holding companies run into it constantly.
When it's due. Attached to the filer's income tax return (or its 5471/8865), by that return's due date including extensions. Missing it can mean a $10,000 penalty per form, plus a reduction in foreign tax credits.
Worked example
A US real estate fund owns a Dutch B.V. that has elected (on Form 8832) to be disregarded, and the B.V. owns an office building in Amsterdam. The fund attaches a Form 8858 for the B.V. to its 1065 each year.
Where you'll see it: Cross-border holding structures, check-the-box elections, and foreign tax credit work.
Full explainer: Form 8858 and foreign disregarded entities →
Full explainer: check-the-box elections and Form 8832 →
Full explainer: Section 987 currency gain or loss on foreign branches →
Form 8865
Return of U.S. Persons With Respect to Certain Foreign Partnerships
What it is. The partnership counterpart to the 5471: an information return about a foreign partnership, such as a Cayman or Luxembourg fund vehicle taxed as a partnership.
Who has to file. US persons in four categories: those who control the partnership (more than 50%); 10% partners when US 10% partners together control it; US persons who contribute property worth more than $100,000 in a year, or who own 10% or more after contributing; and US persons whose stake crosses 10% up or down.
When it's due. Attached to the filer's income tax return, by its due date including extensions. The base penalty is $10,000 per form, and failing to report a contribution can add a penalty of 10% of the property's value (capped at $100,000 unless the failure was intentional).
Worked example
A US pension plan commits $50m to a Cayman fund taxed as a partnership. Its first capital call is $5m, more than $100,000, so it files Form 8865 for that year's contribution.
Where you'll see it: Investing in or running non-US fund vehicles, especially parallel funds and feeders.
Full explainer: the four filer categories and their schedules →
Form 926
Return by a U.S. Transferor of Property to a Foreign Corporation
What it is. A disclosure of a transfer of property to a foreign corporation, made for the year of the transfer. It covers cash paid in for shares and tax-free contributions and reorganisations (sections 332, 351, 354, 356 and 361). It is how the IRS polices the outbound transfer rules in section 367, which can tax a gain when assets leave the US.
Who has to file. US citizens and residents, domestic corporations, and domestic estates and trusts that transfer property to a foreign corporation. For cash, it's required only if the transferor owns at least 10% of the foreign corporation right after the transfer, or has sent it more than $100,000 in the 12 months ending on the transfer date. When a US fund partnership makes the transfer, the filing duty sits with its US partners, each for its share, which is why funds send partners the Form 926 details with their K-1s.
When it's due. Attached to the transferor's income tax return for the year of the transfer, including extensions. The penalty is 10% of the property's value, capped at $100,000 unless the failure was intentional, and the IRS's time to assess tax on the transfer stays open until three years after the form is filed.
Worked example
A US real estate fund puts $10m of cash into a new Luxembourg company that will buy an office building in Germany. Each US partner is treated as transferring its share. A pension fund with 5% of the fund has transferred $500,000, more than $100,000, so it attaches Form 926 to its return for that year. Missing it could cost up to $50,000 (10% of $500,000). Illustrative round numbers.
Where you'll see it: Setting up and funding non-US blockers and holding companies, capital calls into foreign portfolio companies, and K-1 footnotes on foreign transfers.
Form 990-T
Exempt Organization Business Income Tax Return
What it is. Tax-exempt organisations don't pay tax on most investment income, but they do on unrelated business taxable income, such as operating-business income from a partnership or income from debt-financed real estate. The 990-T is where that's reported and paid.
Who has to file. An exempt organisation (including pension trusts, IRAs and university endowments) with $1,000 or more of gross unrelated business income in the year. Fund K-1s are the most common reason endowments and foundations end up filing one, which is why so many prefer to invest through a blocker.
When it's due. For most exempt organisations, the 15th day of the 5th month after year-end (May 15 for a calendar year); for employees' trusts and IRAs, the 15th day of the 4th month (April 15). A six-month extension is available on Form 8868.
Worked example
A university endowment's K-1 from a real estate fund shows $90k of UBTI from debt-financed property. That's over the $1,000 threshold, so the endowment files Form 990-T by May 15 and pays tax on the $90k.
Where you'll see it: LP side-letter negotiations ("use reasonable efforts to avoid UBTI"), blocker decisions, and K-1 review for exempt investors.
Form SS-4
Application for Employer Identification Number (EIN)
What it is. The form the IRS uses to issue an Employer Identification Number (EIN): a business's tax ID, like a Social Security number for an entity. Despite the name, you don't need employees to need one. Almost every new vehicle in a fund structure gets one: the fund itself, parallel funds and feeders, the GP, blockers, and US holding companies for deals.
Who has to file. Any entity that will file a US tax return or information return, pay or withhold US tax, or open a US bank or brokerage account: partnerships (1065 filers), corporations (1120 and 1120-F filers), trusts, and LLCs with more than one owner or with employees. Foreign entities often need one too, for example to file a 1120-F, claim treaty benefits, or be named on a W-8BEN-E or 8805. The application has to name a responsible party: a real person who controls the entity.
When it's due. There's no annual deadline: apply before the entity's first return, payment or bank account, and get a new EIN when the entity changes in certain ways (for example, a partnership that converts to a corporation). Entities based in the US can apply online and get the number straight away; foreign entities apply by fax, mail or phone, which takes longer. If the responsible party changes later, the entity tells the IRS on Form 8822-B within 60 days.
Worked example
A sponsor launches Fund III with a Delaware main fund, a Cayman feeder, a GP entity and a US blocker. Before the first close, each one files Form SS-4. The three US entities apply online and get their EINs the same day; the Cayman feeder applies by fax and waits for its number before the fund admin can set it up for US reporting.
Where you'll see it: Fund formation checklists, opening bank accounts for new deal entities, and filling in the tax ID box on every other form on this page.
Form W-8BEN-E
Certificate of foreign status of beneficial owner (entities)
What it is. A self-certification: the foreign investor states its name, country, entity type, FATCA status and any tax treaty benefits it's claiming (or that its interest qualifies as portfolio interest). The payer relies on it to decide how much to withhold and what to put on the 1042-S.
Who has to file. Nobody files it with the IRS. A foreign entity receiving US income gives it to the withholding agent (the fund, administrator or bank) when asked, usually at subscription. Individuals use the W-8BEN; foreign partnerships acting as intermediaries use the W-8IMY; income connected to a US business uses the W-8ECI.
When it's due. Before the first payment, or the payer must withhold at 30%. It generally stays valid until the end of the third calendar year after it's signed, or sooner if the facts change, so funds chase renewals constantly.
Worked example
A Luxembourg fund lends to a US borrower through a US credit fund. At subscription it provides a W-8BEN-E certifying its status, so the interest can qualify for the portfolio interest exemption and flow through with no US withholding. The form expires at the end of the third calendar year after signing, and the administrator sends a renewal request.
Where you'll see it: Fund subscriptions and onboarding (KYC packs), FATCA/CRS reviews, and withholding rate checks before every distribution.
IRR and fund cash flows
Capital calls, distributions, TVPI and DPI
NCTI (“necktie”)
Net CFC tested income · formerly GILTI
If you own 10%+ of a CFC (a US-controlled foreign company), the US doesn't wait for you to bring the profits home. Each year you include your share of the CFC's ordinary business profit in income. From 2018 to 2025 this was called GILTI. The 2025 tax law renamed it net CFC tested income — pronounced “necktie” — for tax years starting in 2026, and changed the maths.
For a US corporation: a 40% deduction (down from 50%) means an effective rate of about 12.6%; foreign taxes are credited at 90% (up from 80%); and the old carve-out for a return on tangible assets is gone. Rule of thumb: if the foreign country taxes the profit at roughly 14% or more, NCTI usually adds little or nothing. Individuals are hit harder unless they make a Section 962 election.
Worked example
Same CFC, but it's in a low-tax country and pays only $5 of foreign tax. US tax before credits is still $12.60; the credit is 90% × $5 = $4.50; the US parent owes about $8.10 extra — on cash it may never have received.
Where you'll see it: Fund structuring for foreign portfolio companies, Form 8992, and K-3 Part sections on CFC inclusions for US LPs with 10%+ indirect stakes.
Opportunity Zones
Qualified Opportunity Funds (QOFs)
PFIC
Passive foreign investment company
Without the PFIC rules, a US investor could park money in an offshore fund, let it compound tax-free, and pay low capital gains rates decades later. So any foreign company that fails either test — 75% or more of gross income is passive, or 50% or more of its assets produce passive income — is a PFIC, whatever its size, and with no minimum ownership.
The default regime is nasty: gains and big distributions are spread back over the holding period, taxed at the top ordinary rate for each year, plus an interest charge. The escape routes are a QEF election (include your share of income every year, keep capital gain character — needs the company to provide a PFIC Annual Information Statement) or mark-to-market for listed stock (how the two elections compare). Offshore credit funds, feeders and holding companies are the usual suspects.
Worked example
A US LP owns shares in a Cayman holding company that only holds loans. It has no QEF election. After five years the LP sells at a $500k gain. Instead of 20% capital gains tax, the gain is spread over five years, taxed at the top ordinary rate for each year, and an interest charge is added — the total can far exceed $100k. With a timely QEF election, the LP would have paid tax year by year at normal character.
Where you'll see it: PFIC Annual Information Statements sent to US investors, Form 8621, and offering-memorandum tax sections.
Phantom income
PIK interest · OID
Private credit is full of loans where interest is PIK (“payment in kind”): instead of paying cash, the borrower adds the interest to the loan balance. For tax, that unpaid interest is generally original issue discount (OID), and a holder must include OID in income as it accrues — cash or no cash.
The result is phantom income: the fund's LPs get K-1s showing interest income, but no distributions to pay the tax. Funds handle this with tax distributions in the LPA, and tax-exempt LPs are usually fine (interest isn't UBTI unless debt-financed). The related cousin is market discount on loans bought cheap in the secondary market, which is generally taxed as ordinary income when the loan is repaid or sold, unless you elect to include it currently.
Worked example
A credit fund holds a $10m PIK note at 12%. Year 1: $1.2m of interest is added to principal and taxed. Year 2: interest is 12% of $11.2m = $1.344m, again added and taxed. Two years, about $2.5m of taxable income, zero cash — until the loan is repaid.
Where you'll see it: OID schedules, K-1 interest income vs. distribution reconciliations, and tax distribution clauses in the LPA.
Portfolio interest exemption
PIE · the 0% interest rule
Interest is normally FDAP, so 30% withholding. But Congress wanted foreign money to keep buying US debt, so “portfolio interest” is exempt. This one rule is the reason offshore credit funds work at all.
The catches: the lender can't own 10% or more of the borrower (by vote for a corporation, by capital or profits for a partnership); a bank can't use it on loans made in its ordinary lending business; the debt must be in registered form; and interest that depends on the borrower's profits (“contingent interest”) doesn't qualify. Fail any of these and you're back to 30% unless a treaty helps.
Worked example
A Cayman credit fund lends $20m at 9% to a US company it has no equity in. Interest of $1.8m a year comes through with nothing withheld, provided the fund has given the borrower a valid W-8BEN-E. If the same fund also held warrants that pushed it over 10%, that $1.8m would suffer $540k of withholding.
Where you'll see it: Credit agreements (the tax gross-up clause), W-8 collection, and equity kickers that quietly break the 10% test.
Private equity fund
PE fund · GP · LPs · 2 and 20
A PE fund is usually a limited partnership. The limited partners (LPs) are the investors: pension funds, endowments, insurers, sovereign wealth funds and family offices. They commit money up front and the manager calls it in as deals come along (a “capital call”). The general partner (GP) controls the fund, and an affiliated management company runs it day to day. Funds typically have a life of about ten years: roughly five to invest, then the rest to grow and sell.
The manager is paid two ways, often summed up as “2 and 20”: a management fee (commonly around 1.5% to 2% a year of committed capital) and carried interest (often 20% of profits above a preferred return, paid through the waterfall). Because the fund is a partnership, it files a Form 1065 and every partner gets a K-1 and pays tax on its own share. That is also why funds add feeder funds and blockers for foreign and tax-exempt investors.
Worked example
A buyout fund raises $1bn of commitments. A pension fund commits $50m (5%). In year one the GP calls 20%, so the pension fund wires $10m. A 2% management fee on $1bn is $20m a year, of which the pension fund bears $1m. Each year it receives a K-1 showing its 5% share of the fund's income, gains and fee deductions. Illustrative round numbers.
Where you'll see it: Every PE deal: the LPA, subscription documents, capital call and distribution notices, and K-1 season.
Promote
The sponsor's extra share of profit in a real estate deal
PTET
Pass-through entity tax
QEF election vs mark-to-market
The two PFIC elections · Form 8621 · section 1291 default
Realised vs unrealised gain
When a gain becomes taxable
REIT
Real estate investment trust · private REIT
Real estate funds love REITs — not only the listed kind, but private REITs set up inside a fund to hold properties. A REIT is a corporation, so it works like a blocker: foreign investors get dividends instead of ECI, and tax-exempts get dividends instead of UBTI. But unlike a normal blocker, a REIT deducts the dividends it pays, so there's roughly one layer of tax, not two.
To qualify it has to pass ongoing tests: at least 75% of income from real estate sources (and 95% from those plus other passive income), at least 75% of assets in real estate, cash and government securities, distribute 90% of taxable income, have 100+ shareholders, and not be closely held (five or fewer individuals can't own over 50%). Funds often meet the 100-shareholder rule with ~125 small preferred shareholders.
Worked example
A real estate fund puts its apartment portfolio into a private REIT. The REIT earns $20m of taxable income and distributes all of it, so it pays no corporate tax. A foreign LP receives REIT dividends (generally FDAP, with treaty relief possible) rather than filing US returns for every property — and if the REIT is domestically controlled, the fund can later sell REIT shares free of FIRPTA.
Where you'll see it: REIT qualification testing each quarter, 125-shareholder “accommodation” preferred stock, and Form 1120-REIT.
Schedule K-1 (and K-3)
The partner's tax report card
A partnership doesn't pay income tax — it reports. Each partner gets a Schedule K-1 showing their share of everything: ordinary income, interest, capital gains, 163(j) items, UBTI, and more. Partners plug those numbers into their own returns.
Since 2021, partnerships with international items also issue Schedules K-2 and K-3: foreign tax credit detail, CFC and PFIC information, and the data foreign partners need for ECI and 1446. Fund K-1s are famously late because they depend on every underlying investment's K-1 arriving first — hence extensions and estimates.
Worked example
An endowment's K-1 from a real estate fund shows $400k of rental income and a footnote saying $90k of it is UBTI from debt-financed property. The endowment reports the $90k on Form 990-T. The foreign LP's package adds a K-3 and a Form 8805 showing tax the fund already paid on its behalf.
Where you'll see it: Every March–September. Estimates in Q1, final K-1s in Q3, amended ones whenever an underlying investment restates.
Full explainer: Schedules K-2 and K-3, the international add-ons to the K-1 →
Schedule M-1 and M-3
Book-to-tax reconciliation · permanent vs temporary differences
Schedules K-2 and K-3
International add-ons to Form 1065 and the K-1
Season-and-sell
Avoiding a US lending business
Trading stocks and securities for your own account has a statutory safe harbour — foreign investors can do it all day without being in a US business. Making loans doesn't. If an offshore fund regularly originates US loans, it risks being in a US lending business, which turns its interest and fees into ECI for every foreign LP.
The workaround is season-and-sell: an unrelated party (often a bank or an onshore affiliate) makes the loan, holds it for a “seasoning” period with real risk, then sells it to the fund on terms the fund didn't dictate in advance. There's no statutory number of days and the IRS has never blessed a specific period, so practice varies. The alternatives: lend through a treaty-country fund, a blocker, a BDC, or a REIT.
Worked example
A Cayman direct-lending fund wants a $25m slice of a new US term loan. Instead of signing as an original lender, it buys the slice from a bank's syndication desk after the bank has held it for a period. The interest it earns is portfolio interest (often 0% withholding) rather than ECI taxed at 21% plus filings.
Where you'll see it: Fund-level “US trade or business” guidelines, trading desk procedures, and credit fund tax memos.
Section 1446 withholding
1446(a) & 1446(f)
1446(a): a partnership with ECI must pay tax on behalf of its foreign partners, quarterly, at the highest rate for that partner type — 37% for individuals, 21% for corporations. It doesn't matter whether any cash was distributed. Partners get credit for it via Form 8805.
1446(f): when a foreign partner sells its interest in a partnership that has a US business, the buyer must withhold 10% of the amount realised. Sellers can reduce or eliminate it with certifications — for example, if the partnership certifies that its ECI gain would be under 10% of total gain. If the buyer doesn't withhold, the partnership itself can be on the hook to withhold from future distributions to the buyer — so secondaries teams care a lot.
Worked example
A Japanese pension sells its stake in a US infrastructure fund on the secondary market for $40m. Unless a certification applies, the buyer withholds $4m at closing. The pension later files to settle its actual tax on the ECI portion of its gain.
Where you'll see it: Forms 8804, 8805, 8813; W-8IMY packages; secondary-sale transfer documents and 1446(f) certifications.
Section 163(j)
The business interest limit
Leveraged buyouts run on debt, and debt runs on deductible interest. Section 163(j) caps that deduction at business interest income + 30% of “adjusted taxable income” (ATI). For tax years beginning after 2024, ATI is back to an EBITDA-style measure — depreciation and amortisation are added back again — which made the cap much looser for capital-heavy businesses than it was in 2022–2024.
Disallowed interest isn't lost; it carries forward indefinitely. Smaller businesses under a gross-receipts threshold are exempt, and real estate businesses can elect out in exchange for slower depreciation. In a partnership the test is run at the partnership level and excess amounts are pushed out to partners — which is why your K-1 may carry a line about it.
Worked example
A portfolio company has ATI of $10m and pays $5m of interest on its acquisition debt. It deducts $3m this year; the other $2m carries forward. If EBITDA grows to $20m next year, the cap rises to $6m and some of the carried-forward interest can be used.
Where you'll see it: Buyout models (tax line), Form 8990, and the “excess business interest expense” box on partnership K-1s.
Section 987
Currency gain or loss on foreign branches (QBUs) · CFC exemption election
Tax receivable agreement (TRA)
Paid to pre-IPO owners after an Up-C listing
Tax true-ups
Estimates vs final accounts
Thin cap
Thin capitalisation
Interest is deductible; dividends aren't. So if an investor funds a blocker or a US portfolio company partly with a loan instead of all equity, the interest on that loan cuts the company's 21% corporate tax. A company with very little equity and lots of shareholder debt is “thinly capitalised”.
The US has no single bright-line ratio. Instead several rules squeeze from different sides: Section 163(j) caps the deduction (see 163(j)); the IRS can treat “debt” that doesn't look like real debt as equity (Section 385 and decades of case law — fixed maturity, real interest, a creditor who'd actually sue); interest paid to a 10%+ owner doesn't qualify for the portfolio interest exemption, so withholding may apply; and anti-hybrid rules block deductions where the other side doesn't pay tax. Tax teams model all of these together.
Worked example
A blocker earns $10 of profit. Funded all-equity, it pays $2.10 of tax. Fund it with a $60 shareholder loan at 8% instead, and $4.80 of interest comes off the top: tax drops to about $1.09. But the $4.80 paid offshore to a 10%+ owner may face 30% withholding unless a treaty cuts it — which is why the lender's location matters as much as the ratio.
Where you'll see it: Blocker capitalisation memos, shareholder loan agreements, transfer-pricing support for the interest rate.
UBTI
Unrelated business taxable income · incl. UDFI
Endowments, foundations, pension plans and IRAs are tax-exempt — but only on investment income. If they earn money from running a business (or from a fund that runs one), that's UBTI and it's taxed.
The trap most people miss is the debt rule. Income from property bought with borrowed money is UDFI (unrelated debt-financed income), and the borrowed share of it counts as UBTI even if it's “just” rent or dividends. Leveraged real estate funds are the classic case. Some exempts — qualified pension trusts and educational institutions — can escape UDFI on real estate if the fund meets a set of conditions known as the “fractions rule.” Everyone else uses a blocker or avoids leverage.
Worked example
A private foundation invests in a fund that buys a $10m building with a $6m mortgage. The building nets $1m of rent. Because the debt is 60% of the building's basis, roughly 60% of the income — $600k — is UDFI, taxable to the foundation (after a $1,000 specific deduction) and reported on Form 990-T.
Where you'll see it: LPA covenants to “use commercially reasonable efforts to avoid UBTI”, subscription-line borrowing debates, and Form 990-T.
Unrecaptured section 1250 gain
The 25% rate on depreciation when real estate is sold
Up-C structure
Umbrella partnership C corporation
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This glossary is general information, simplified for learning. It is not tax, legal or investment advice, and real structures turn on facts and documents not shown here.