Blocker Agreement

Taxable income collected by a holding company on a K-1 schedule generally fall into the category of “effectively related to a U.S. business or business” income for foreign investors and unrelated business tax revenues (UBTI) for tax-exempt U.S. investors. Foreign investors want to avoid being effectively allocated to related income because the commitment to allocate that income subjects them to a U.S. income tax obligation and perhaps to federal income and withholding taxes. Exempt investors want to avoid being allocated income that is UBTI, as these incomes are subject to U.S. excise duties to otherwise tax-exempt investors. Thus, neither foreign investors nor exempt investors wish to directly hold a stake in a U.S. company imposed by the S.A. Therefore, the use of a U.S. company as a “blocking company” to block the flow of revenue on a K-1 calendar at the company level. Blockers are an integral part of international tax planning, especially for incoming transactions involving foreign persons in U.S.

companies. Blockers are U.S. or foreign companies classified as capital corporations for U.S. income tax purposes. When they are trained in the United States, they are usually created as state laws. On the other hand, offshore blockers can check the box under Regs. P. 301.7701-3 to select their classification for federal tax purposes, or they may be classified as capital companies under standard rules, in accordance with Department of Finance rules.

In addition, blockers prevent the allocation of a trade or transaction through the chain to the fund (if the blocker is less than the fund) and to foreign investors (if the blocker is less or greater than the fund). Foreign investors are concerned about the imputation of a trade or transaction in the United States, as this could lead to the subject of U.S. tax on income that would otherwise be taxed in the United States. Such an imputation would also result in the foreign investor being subject to U.S. tax reporting obligations. Thus, a blocker eliminates both the risk of submitting a U.S. file.