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Location, Location, Location: New York’s Apportionment Rules for Investment Managers

New York State recently issued final corporate franchise tax regulations for sourcing income (the “Regulations”), including specific sourcing rules for service fees paid by passive investment customers (“PICs”) to investment managers operating in corporate form.  These Regulations supplant the general approach for apportioning services income for New York state tax purposes, which is primarily to the location where the customer receives the benefits of the services.

For the PIC rules to apply to service fees paid to an investment manager, a fund paying the fees must satisfy the definition of a PIC, and must pay fees to an investment manager for management or distribution services.  In general, PICs are entities, other than publicly traded corporations or regulated investment companies, with multiple owners that pool capital from passive investors for trading or investing in stocks or securities as their only business.  Assuming that a fund is a PIC, its corporate investment manager is required to source fees which the PIC pays for management or distribution services to the locations of the various beneficial owners of the PIC, and if those locations cannot be ascertained, to the location where the PIC monitors the investment manager’s services.

For investment managers operating in the corporate form, these rules may impact both the corporation’s New York state corporate franchise tax and its New York City business corporation tax reporting.  The Regulations apply retroactively to January 1, 2015.  Given this retroactive application, investment managers should consult their tax advisors both on their past and future impact.

Key Contacts

Adam Blakemore
T. +44 (0) 20 7170 8697

Linda Z. Swartz
T. +1 212 504 6062

Jon Brose
T. +1 212 504 6376

Andrew Carlon
T. +1 212 504 6378

Mark P. Howe
T. +1 202 862 2236

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