Press Room: Tax Release

May 07, 2012

Good News from the City of Brotherly Love for Fund Companies and Investment Fund Managers!

The city of Philadelphia recently enacted Bill No. 120007 (the Bill), providing for an exclusion from the city’s Business Income and Receipts Tax (BIRT) and Net Profits Tax (NPT) for investment companies, general partners, and limited liability company ( LLC) managing members with respect to income earned on the so-called “carried interest.” The goal of the Bill is to attract investment companies to Philadelphia, in hopes of drawing and retaining other businesses that rely on investment companies as a source of capital.

The Philadelphia BIRT is imposed on individuals, estates, trusts, and incorporated and unincorporated entities engaged in business or in any activity for profit in the city of Philadelphia. The BIRT includes both a gross receipts tax (at a rate of 0.1415%) and a net income tax (at a rate of 6.45%). The Philadelphia NPT is levied on the net profits of individuals, estates, trusts, and unincorporated entities engaged in business in the city of Philadelphia (corporations are exempt). The rate of tax is 3.9280% for resident individuals and 3.4985% for nonresidents.

The Bill, signed by Mayor Michael Nutter on April 10, 2012, exempts investment companies (no matter how they are organized), as defined in the Investment Company Act of 1940 from the Philadelphia BIRT and the NPT. The relevant section of the Bill, which also excludes the carried interest from the BIRT and NPT tax base, is as follows:

  • The Bill exempts any entity or natural person directly or indirectly owning a general partnership interest or a managing member interest in a limited liability company in an investment company that is not publicly traded, to the extent that the activities consist of the exercise of management responsibilities and result in income that is measured by or otherwise based on the financial performance of the investment company.

Based on discussions with the city of Philadelphia Law Department, it is the city’s position that the exclusion of the “carried interest” from the definition of business should only apply to any performance based fees earned by a general partner or investment fund manager (thus “carried interest” income would be excluded from the BIRT/NPT tax base). The legislation does not provide an exclusion from the Philadelphia BIRT/NPT tax base for the management fees (non-performance based fees) earned by any fund manager or general partner. 

The Bill’s effective date is for tax years beginning on or after January 1, 2012.

WTAS’ State and Local Tax practice includes experienced practitioners in all aspects of multistate taxation. Our tax professionals can assist both individuals and entities in determining the impact that this Bill will have on your business, discuss options that may remediate current tax exposures, and help develop tax planning/accounting systems that can help minimize your risk and alleviate your compliance burden.