Email of the day (1)
Comment of the Day

April 22 2013

Commentary by Eoin Treacy

Email of the day (1)

on tax implications of investing in US listed Master Limited Partnerships (MLPs) for foreign investors
“MLPs have a rather complex taxation structure; therefore they are less suitable for foreign investors, like Business Development Corporations (BDCs). This should be mentioned in any article aimed at a non-US audience. Further complications may arise as a consequence of bilateral agreements between the US and the investor's country of residence in the case of dividend paying equities. See, e.g., article/243699-tax- implications-for-foreign-mlp- investors

Eoin Treacy's view Thank you for this informative email contributed in the spirit of Empowerment Through Knowledge. MLPs have been highlighted on a number of occasions at Fullermoney over the last decade not least because they offer attractive yields, are tax advantaged for US investors and represent some of the assets that benefit most from the USA's revolution in unconventional energy development. However, as you point out, there are tax implications for foreign investors in buying any US listed vehicle. This is complicated by the special status of MLPs within the US tax code. Here is a section from the article:

To solve this problem, we need to understand a few things about how the US taxes foreigners generally. Foreign investors are fully responsible for federal income tax liabilities stemming from effectively connected income (ECI), or income derived from a U.S. trade or business. Foreign owners of MLP units will have all of their distributions subject to withholding at the highest marginal tax rate. This differs from a U.S. investor who is subject to taxes (payable after the fact) on their allocated net income, which is typically substantially less than the distributions earned (see first column below).

The result of this excess withholding is that Heinz is subject to more taxes than Hinds is on an annual basis, and must file a U.S. federal tax return to get his credit back on the excess withholding. This credit goes towards paying the Heinz's taxes on gains, resulting in an after-tax return equivalent to his U.S.-based cousin (see second column below).

Now, Heinz could choose not to file the federal tax return announcing his gains and live with the excess withholding. If he were to do that and keep his gains, Heinz could end up paying less tax than a typical U.S. investor would (see third column below), he just wouldn't be following the rules. From what I understand, that is the route many foreign investors take.

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