TL;DR: A corporation an investor sits behind so that messy US income stops at the corporation instead of flowing through to them. It costs a layer of corporate tax.
Watch: What is a blocker? (2 min, with captions) · Watch on YouTube

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).

How a blocker works$100 of business income flows from the fund into a blocker corporation, which pays $21 of corporate tax to the IRS; the investor receives the remaining $79 as a dividend, with no US return and no UBTI.Foreign or tax-exempt investorno US return · no UBTIBlocker corp (Delaware)files Form 1120pays 21% corporate taxIRS$21 taxFund → US business income$100 of ECI / UBTI$79 dividend$100$21$79
The blocker absorbs the problem income and the tax that comes with it.

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.

Code: IRC §§ 11, 512, 864, 881 · Related: ECI, UBTI, Thin cap, FIRPTA

See all 53 terms in the glossary

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.