Engineering Pass-Throughs in International Tax: The Case of Private Equity Funds

72 Pages Posted: 25 Oct 2019 Last revised: 6 Nov 2019

See all articles by Young Ran (Christine) Kim

Young Ran (Christine) Kim

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

Date Written: October 15, 2019


Fund investment, or indirect investment, does not entail entity-level taxation domestically, so investors enjoy “tax neutrality” between direct and indirect investments made within a country. In contrast, when investments are made across borders, tax neutrality cannot be guaranteed because current international tax regimes are built upon bilateral tax treaties and lack pass-through tax rules for multinational fund investment schemes. This may put investors in a worse tax position than had they invested directly.

In response, investors have created many strategies to reduce tax liabilities internationally when investing indirectly. Sometimes those strategies enable investors to pay even less taxes than they would with a tax-neutral benchmark. Recognizing that systematic pass-through taxation more likely would achieve tax neutrality goals, the OECD, through its limited rule-making power, developed several proposals for pass-through treatment. Unfortunately, none of them have been effective, either because of too narrow implementation or because they supply bilateral solutions to a multilateral problem.

As an alternative, this Article proposes an innovative multilateral approach in which both the source country and the residence country may look-through certain fund vehicles in intermediary countries and will collect tax as if the investment was made directly from the residence country to the source country. This Article further develops the proposal by demonstrating its feasibility for private equity funds (PEFs). PEFs offer unique opportunities to reform international pass-through taxation because they tend to have only a handful of high-profile investors who rarely change during the fund’s lifetime. Although information about PEF investors notoriously has been less available to tax authorities, new public and private databases as well as a newly enhanced system for the exchange of tax information make such information now more accessible to governments. Tax authorities will be able to obtain information on the considerably small and manageable number of investors behind PEFs and implement pass-through taxation to realize robust tax neutrality goals.

Keywords: Pass-through taxation, private equity funds, international tax, business tax, partnership tax, tax treaty, OECD, tax transparency, exchange of information, FATCA

JEL Classification: K34, F23, G24, G28,

Suggested Citation

Kim, Young Ran, Engineering Pass-Throughs in International Tax: The Case of Private Equity Funds (October 15, 2019). 56 San Diego L. Rev. 707 (2019); University of Utah College of Law Research Paper No. 333. Available at SSRN:

Young Ran 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

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