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Tax-Deferred Stock Rights for Offshore Funds

Under Revenue Ruling 2014-18, the IRS has clarified that offshore funds (and other nonqualified entities under Section 457A) may issue nonqualified stock options and stock-settled Stock Appreciation Rights (SAR) without triggering taxation under Section 457A. Prior to this ruling, certain deferred compensation was includible as taxable income of an employee or service provider. This discouraged U.S. based fund managers and service providers from deferring incentive fees from their offshore funds.

The ruling provides a clear fact pattern for a service provider to receive incentive fees on a tax-deferred basis utilizing stock options or stock settled SARs. For more details on the revenue ruling and its impact on compensation from offshore funds, please visit our recent benefits alert here.

Peter Alwardt is a Tax Partner specializing in employee benefits, tax and ERISA issues for domestic and international clients. He is a member of the American Institute of Certified Public Accountants and NY State Society of CPAs.

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