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Charities investing in US private equity funds

UK charities are increasingly encouraged to become limited partners in private equity funds targeting US acquisitions. Thomas Dick (DLA Piper UK) examines the related tax issues.

Endowed UK charities are increasingly encouraged to become limited partners in private equity funds where investment guidelines often include acquiring US businesses. Charities entering these funds for the first time may be surprised to find them withholding US tax on some items of US source income which cannot be relieved in the UK.

Despite the US’s acceptance of the principle of charitable fiscal immunity private equity funds must withhold tax on two types of US source income allocated to a UK charity taking the position that it is equivalent to a US charity:

  1. ‘unrelated business taxable income’ (UBTI) which serves the same purpose as non-primary purpose trading income in the UK; and
  2. for a UK charity that...

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