The Managed Funds Association (MFA) is urging the Department of the Treasury and the Internal Revenue Service (IRS) to preserve the tax treatment that allows certain foreign investment funds to make passive investments in U.S. credit markets.
In a letter to the agencies, MFA recommends clear rules that distinguish ordinary investment activity from commercial banking.
“Foreign investment in the U.S. supports American businesses, innovation, manufacturing, and jobs,” Bryan Corbett, MFA president and CEO, said. “Rules that create uncertainty will drive capital elsewhere. Treasury and the IRS should preserve the distinction between passive investment and commercial lending to keep capital flowing to American businesses and maintain U.S. competitiveness.”
Section 892 generally exempts passive investment income earned by foreign governments from U.S. tax. The proposed facts-and-circumstances test is vague and could reclassify routine loans and debt investments as commercial activity, making them ineligible for the Section 892 exemption. This would discourage certain foreign investors from providing capital to U.S. funds, businesses, and credit markets.
MFA recommends that Treasury and the IRS replace the proposed facts-and-circumstances test with a clear standard. The clear standard should evaluate whether the investor receives a return on capital or earns payment for providing services and the lender treats the borrower as a customer and provides banking services, rather than simply investing capital.
MFA also urged Treasury and the IRS to protect existing investments by ensuring that routine loan modifications and draws under existing credit facilities do not trigger the new rules.