TL;DR: A way for offshore credit funds to buy US loans without being treated as lenders doing business in the US: someone else originates the loan, holds it for a while, then sells it to the fund.

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.

Season-and-sell timelineDay 0: an unrelated originator makes the loan; it holds the loan through a seasoning period; then the offshore fund buys it in the secondary market. Direct origination by the fund risks a US lending business.Day 0originator lendsLaterfund buys the loanseasoning period — originator bears the riskloanFund originates directly → possible US lendingbusiness → ECI for every foreign LP
Who made the loan, and who carried the risk while it seasoned, decide where the income lands.

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.

Code: IRC § 864(b)(2); Treas. Reg. § 1.864-2(c) · Related: ECI, Portfolio interest exemption, Phantom income

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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.