What are tax representation side letters?
Investments in certain kinds of portfolio companies may yield adverse or complicated tax obligations for your investors. These investments, generally, are:
- Equity investments in flow-through portfolio companies (e.g. limited partnerships, S-corps, etc.)
- Investments in foreign (non-US) portfolio companies
Tax representation side letters are provided by Belltower to clarify with portfolio companies:
- Aspects of the portfolio company's structure or activity that may yield adverse or complicated tax obligations
- Responsibilities between Belltower and the portfolio company in handling those obligations
These side letters require that the portfolio company alert Belltower in the event that their structure or activity has changed. In some cases, Belltower may need to follow up with portfolio companies ahead of annual tax reporting to clarify any potential tax reporting obligations.
What are the representations requested?
Investments in foreign (non-US) portfolio companies
If an AngelList-supported fund is invested in a foreign portfolio company and we do not have a standard tax representation side letter on file, we follow up with the portfolio company annually to request the below tax representations.
- Is the foreign portfolio company a corporation for US tax purposes?
- Most companies with liability protection locally default to "corporations" for US tax purposes, but if you filed form 8832 with the US Internal Revenue Service, it will indicate definitively if you are a corporation (or partnership) for US tax purposes.
- Even if a portfolio company is not domiciled in the US, they are still considered to have a US tax classification, either as a corporation or a partnership.
- Does any US shareholder own 10% or more of the portfolio company?
- This is True if the portfolio company is a Controlled Foreign Corporation* (“CFC”) that otherwise would be considered a PFIC and is exempt from the PFIC regime for the years they remain U.S. shareholders of a CFC.
- Is more than 75% of the portfolio company’s gross income derived from investments?
- In other words, is less than 25% of the portfolio company’s gross income derived from its operating business income?
- This is True if the portfolio company is a Passive Foreign Investment Company (“PFIC”).
- Are more than 50% of the portfolio company’s assets investments that produce investment income in the form of earned interest, dividends, or capital gains?
- This is True if the portfolio company is a Passive Foreign Investment Company (“PFIC”).
- Do you confirm that the tax representations provided are accurate, and does the portfolio company agree to reach out no later than 60 days after each calendar year's end to the extent any of these representations change?
- This request will be sent annually as part of our due diligence process unless the portfolio company agrees to proactively notify AngelList of any changes to the tax representations above.
*Controlled Foreign Corporation - to be considered a CFC, more than 50% of the ownership must be owned by U.S. shareholders, who must also own at least 10% of the company.