The United States plans to "tax" global sovereign wealth funds, potentially triggering a new round of capital withdrawals

Mars Finance News: On January 16, the U.S. authorities proposed a major reform that could require sovereign wealth funds to pay taxes on their investments in the United States, which will impact some of the largest investors in the U.S. private equity industry. The IRS released a proposal in December last year to amend relevant provisions in the Internal Revenue Code regarding sovereign wealth funds and certain public pension funds seeking U.S. tax exemptions. This is the latest move in a series of policy shocks introduced by the Trump administration, which has prompted sovereign wealth funds to diversify their investment exposure in the U.S. In this proposal, the IRS will expand the definition of “business activities” to include certain activities previously considered as investments. These changes will affect situations such as sovereign wealth funds providing loans to companies and making direct equity investments in private firms. According to the new proposal, activities that may trigger tax obligations for sovereign wealth funds include direct lending to companies and playing a role in bond default restructurings. These changes may also impact so-called “blockers,” which are special purpose vehicles (SPVs) often used by sovereign wealth funds and pension funds to co-invest directly with private equity firms through joint investment structures in portfolio companies. (Jin10)