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Cayman Islands Partnership, With No Staff, Not Recognized and Attributed US Income From US Agent/Advisor

Cayman Islands Partnership, With No Staff, Not Recognized and Attributed US Income From US Agent/Advisor

According to Law360, a securities partnership based in the Cayman Islands owes federal income taxes on earnings connected with the management of its assets by a New Jersey advisory firm, the U.S. Tax Court ruled in YA Global Investments LP et al. v. Commissioner of Internal Revenue, docket numbers 14546-15 and 28751-15, saying the relationship constitutes engagement in a U.S. business.

The advisory firm's regular participation qualified the offshore partnership, YA Global Investments LP, as being engaged in a U.S. business, making it liable for withholding taxes, the Tax Court said in an opinion. Under Internal Revenue Code Section 1446, the partnership is required to pay tax on the portion of its income effectively connected with its U.S. business that was allocated to foreign partners, according to the opinion, which upheld partnership adjustments by the Internal Revenue Service for 2006 through 2008.

The IRS Had Argued That The Activities Of The Advisory Firm, Yorkville Advisors GP LLC, Were Attributable To YA Global Because The Partnership Had No Employees And Couldn't Perform Any Activities Itself, According To The Opinion.

YA Global had argued that Yorkville was its service provider rather than an agent whose activities could be attributed to the partnership for determining whether it was engaged in a U.S. business.

The court reasoned that YA Global, which provided funding to portfolio companies in exchange for stock and other securities, maintained control over Yorkville and expressly appointed the advisory firm as the partnership's agent in its investment management agreements. 

Furthermore, the activities that Yorkville performed on behalf of the partnership were "continuous, regular, and engaged in for the primary purpose of income or profit," meeting the requirements for engagement in a U.S. business as defined by case law and under IRC Section 864(b), the court said.

Planning Point - Need to staff foreign entities for them to be recognized as separate from US affiliates.

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Read more at: Tax Times blog

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