Carried Interest and Beyond: The Nature of Private Equity Investment and Its International Tax Implications

64 Pages Posted: 10 Jun 2018 Last revised: 17 Jul 2018

See all articles by Young Ran (Christine) Kim

Young Ran (Christine) Kim

University of Utah, S.J. Quinney College of Law

Date Written: May 23, 2018


Private equity funds (PEFs) eliminate entity-level taxation by using pass-through entities. They further minimize their investors’ tax liability by taking the position that profits distributed to both general partners (GPs) and limited partners (LPs) are passive portfolio investment income and taxed preferentially. The taxation of carried interest at low capital gains rates is likely the most infamous loophole. This article challenges such tax position and instead argues that the nature of PEF investment is active. PEFs seek to influence their portfolio companies to increase their value so that they actively manage the companies by acquiring at least 10% of their stock, which does not conceptually accord with portfolio investments. The proposed theory that PEFs are active is further supported by recent proposals on carried interest as well as cases and rulings holding that PEFs are involved in a “trade or business.”

This article also considers international tax implications of the new theory: it switches the primary tax jurisdiction to levy tax on PEFs’ cross-border income. This change may be justified for GPs who erode the tax base of a source country, but less justified for LPs because of their genuinely passive involvement, notwithstanding that LPs’ tax-exempt or nonresident status enables GPs’ abusive activities. Finally, determining the true nature of PEF investment and reforming PEF tax accordingly would increase worldwide revenue without significantly reducing the revenue of traditional residence countries, because the traditional residence countries, such as the United States, are also major source countries in the PEF industry.

Keywords: Private equity, International tax, Carried interest, Source taxation, Residence taxation, Foreign portfolio investment

JEL Classification: G23, G24, H25, G26, K34, F21, F23

Suggested Citation

Kim, Young Ran (Christine), Carried Interest and Beyond: The Nature of Private Equity Investment and Its International Tax Implications (May 23, 2018). Virginia Tax Review, Vol. 37, No. 3, p.421 (2018), University of Utah College of Law Research Paper No. 270, Available at SSRN:

Young Ran (Christine) Kim (Contact Author)

University of Utah, S.J. Quinney College of Law ( email )

383 S. University Street
Salt Lake City, UT 84112-0730
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics