New Limitation on Deferral of Compensation Paid by Certain Foreign Corporations and Partnerships with Foreign and Tax-Exempt Investors


Section 457A was added to the Internal Revenue Code of 1986 (the “Code”) by the Emergency Economic Stabilization Act in October 2008 and will become generally effective with respect to deferred fees and compensation attributable to services performed after December 31, 2008.

Generally, Section 457A accelerates the timing of income inclusion of nonqualified deferred compensation payable by certain tax-indifferent parties, including offshore investment funds and U.S. investment funds that have foreign or taxexempt investors. Section 457A is in addition to Section 409A of the Code, which has substantially changed taxation of nonqualified deferred compensation since January 1, 2005. Section 457A provides that any “nonqualified deferred compensation” (defined in accordance with Section 409A) of a “nonqualified entity” is taxable when it is no longer subject to a “substantial risk of forfeiture.” Under Section 457A, a “substantial risk of forfeiture” exists only if the right to the compensation is conditioned upon the future performance of substantial services; performance goal requirements do not create a “substantial risk of forfeiture” for this purpose.

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