Taxation of Private Equity and Hedge Fund Partnerships: Characterization of Carried Interest (Congressional Research Service)

September 2007

KEYWORDS: carried interest, partnership, hedge funds, Private Equity, House Committee on Ways and Means, United Kingdom, Hungary, Latvia, Netherlands, Poland, Portugal, Romania, Slovenia, Switzerland, Austria, Czech Republic, Denmark, Estonia, France, Greece, Ireland, Italy, Luxembourg, Norway, Spain, Sweden, United States, Belgium, Finland, Germany, general partner, taxes, Eric Solomon, Senate Committee on Finance

Authors:

Donald J. Marples

Organizations:
  • Congressional Research Service

Summary:

General partners in most private equity and hedge funds are compensated in two ways. First, to the extent that they contribute their capital in the funds, they share in the appreciation of the assets. Second, they charge the limited partners two kinds of annual fees: a percentage of total fund assets (usually in the 1% to 2% range), and a percentage of the fund’s earnings (usually 15% to 25%, once specified benchmarks are met). The latter performance fee is called “carried interest” and is treated, or characterized, as capital gains under current tax rules. H.R. 2834, introduced by Representative Levin on June 22, 2007, would characterize carried interest as ordinary income. This report provides background on the issues related to the debate concerning the characterization of carried interest. It will be updated as legislative developments warrant.

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