The Use of Foreign Blocker Corporations by U.S. Nonprofits: Should Blockers Be Blocked?

Abstract

Many U.S. nonprofits use offshore blocker corporations to avoid paying the debt-financed unrelated business income tax (UBIT). Some law-makers and commentators, however, criticize the practice as abusive. This article takes a closer look at the issue. It concludes that the use of offshore blocker corporations does not undermine the main purposes of the debt-financed UBIT, but that the practice nevertheless raises some serious policy concerns. The article thus recommends that Congress reform this tax: either by eliminating the blocker corporation workaround to the debt-financed UBIT or, alternatively, by repealing the debt-financed UBIT completely but leaving in place or even expanding the debt-financed UBIT’s reporting requirements.

Keywords: UBIT, UBTI, tax haven, blocker, tax