Why you should care about ECI

The tax reform passed in January could scupper secondaries deals involving sales from non-US sellers.

Speed and deliverability have become increasingly important elements of secondaries transactions, but both could be affected by new rules around effectively connected income.

Click here to see a three-minute video on ECI in which James McCredie, a partner at Macfarlanes who leads the secondary transactions practice for the law firm’s tax group, explains what it is, why sales involving UK and European institutional investors and funds of funds face bigger challenges and how it could stop deals.

ECI means non-US sellers of stakes in limited partnerships that have exposure to a US trade or business – even as little as $1 – can be subject to a 10 percent tax on their realisation. What’s more, the onus to withhold the tax rests with the buyer.

In other words, if you are buying a stake in a fund, you need to seek assurance from the seller or the GP in the form of a certificate that no assets are exposed to the US, or if they are, be prepared to withhold 10 percent of the purchase price for the Internal Revenue Service.

“The measure has the potential to significantly change the way in which buyers and sellers approach the sale of a partnership interest in a fund that conducts business in the US,” McCredie says.

You may want to call your tax lawyer now.