Proposed Federal Tax Legislation Would Alter U.S. Taxation of Foreign Entities

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Foreign investors, and particularly foreign hedge funds, should take note of recently introduced U.S. tax legislation. On March 2, 2009, the Stop Tax Haven Abuse Act was introduced by Senator Carl Levin as Senate Bill 506 ("S.506"). It seeks to eliminate the use of offshore tax havens and correct other abusive tax situations. S.506 is similar to the 2007 proposed legislation (S.681) introduced by Senator Levin and co-sponsored by then-Senator Obama. A companion bill (H.R. 1265) was introduced in the U.S. House of Representatives and co-sponsored by 59 Democrats. U.S. Treasury Secretary Geithner recently stated that the administration supports legislation to shut down offshore tax havens.

The proposed legislation, among other measures, would cause corporations formed in certain foreign jurisdictions that are managed and controlled in the U.S. to be treated as U.S. corporations for federal income tax purposes. If enacted, S.506 would also change the U.S. tax treatment of certain foreign trusts, eliminate a stock dividend loophole, add significant reporting and disclosure requirements, and broaden penalties and tax enforcement.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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