The IRC Section 409A regulation will require hedge fund managers to pay tax on compensation deferred offshore to the extent that they do not comply, along with a 20% penalty and interest. For some funds, deferred fees will fall into this category.
“In the case of some hedge funds, performance fees and management fees are deferred and paid later into an offshore account – particularly in the case of illiquid investments, where fees cannot be charged up front, and instead will be charged when the investment is liquidated, as with side pockets,” says David Simonetti, senior manager in Grant Thornton’s compensation and benefits group.
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