Hi Guys,
So I have been told by a lawyer that promote is not tax deductible for investors. I.e, investors should pay tax on the profits of the pre promote cashflow, not the profits of the net cashflow post promote.
This threw me back as I have always seen investors taxed on the net cashflow post promote. Am I being crazy here or is the lawyer wrong?
This is for a UK deal.
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I'd go with your lawyer's advice assuming their background is tax. I have seen it as tax deductible on some deals, but this is where the investor was 100% of the equity and the promote was a performance fee paid to the development manager subject to achieving an IRR hurdle. If the promote was structured as a cashflow / gain accruing to different share classes (assuming says 95% class A / 5% class B JV) I can see rationale for how it wouldn't be tax deductible. There's several ways to structure a promote, so I'd always go with the advice of a tax consultant on it (assuming they're qualified to advise on it).
Interesting. It makes sense in your case where 100% one equity partner paying out promote to another party which is an expense. Although I am not a tax accountant or a tax lawyer, paying taxes on pre promote CF and then paying taxes on promote - isn't that double taxation? I might be wrong, been wrong before..
Should the promote not be calculated on the basis of net returns after all income and corporate gain taxes have been paid?
Again I might be wrong, but in my experience: net cash flow (NCF) is distributed to LP/GP/ownership - then everyone pays taxes based on their tax situation. We usually had big4 do the cals out of capital account for distributions and tax accounting for all GP/LP/ownership
Agreed, this is how I was shown to always do it. Promote would be calculated on the gross cashflow to investors, after calculating the promote one then normally calculates the tax liability (at least in my case, given the LP's in our deals provide 100% of the capital).
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