What are the US tax implications for a European LP investing in a Delaware LP or LLC?

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Asked by

Community Member

May 03, 2023

Accounting & Taxes

What are the US tax implications for a European LP investing in a Delaware LP or LLC?

One of my European LPs is asking about the US tax implications from becoming an LP in a Delaware LP or LLC. We have not yet engaged lawyers and tax advisors for fund formation so hoping that someone can share links. I am seeing conflicting reports. According to KPMG 2015 () page 25-26 see section 'Sale or Exchange of Capital Assets' gain on the sale of investments is not taxed in United States if you are nonresident alien but then according to if the Delaware LP entity (the fund) 'is engaged in U.S. trade or business and has effectively connected income' my Limited Partner will have to pay withholding taxes. Any advise?

1 See in Base

Answered by

Zach Rosengard

Jul 25, 2023

The KPMG article is correct, capital gains are not sourced to the US and therefore will not be taxed in the US for your foreign LPs. To address your point about engaging in US trade or business, investment entities are not considered to be engaged in a trade or business unless they are trading pretty much daily more like a hedge fund (venture capital and private equity do not take part in as many transactions). The income generated by the LP entity would not be considered ECI and they foreign LP would only need to pay tax in their home country.

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