Hi. I read quite a lot of stuff here and on other websites about the following issue: Does a company/ an individual resident outside of the US (let's say in Europe) has to pay taxes to the IRS if it/he invests in a US hedge Fund established as a limited partnership? Of course, we would assume that this ânon-US residentâ does not have a green card, does not spend more than 183 days in the US ('resident rule'), and does not have any other investment/business in the US than this investment in the LP: the investor is for instance an English/Spanish/French/German/Swiss individual or company and his/its only link with the US is his/its investment in a US hedge fund established as a LP. Here are the things that seem to be clear: 1. As a Limited Partnership (or a LLC taxed as a partnership and not as a corporation), the US hedge fund is a "pass-through" entity, so each investor pays tax on his own income from the partnership. 2. Therefore, the US investors just would have to pay their taxes to the IRS normally, as it would be the case in any other direct investment, or if they did their own trading. 3. As they invest in a "pass-through" entity, the investors may get: - dividends and coupons - stocks capital gains - futures capital gains The investors would be taxed by the IRS accordingly, profiting from the 60/40 futures taxes, and so on. 4. The non-US investors have the same 'advantages': If the LP receives dividends, it will be treated as dividends in the hands of the foreign partners, and if the LP receives capital gains, it will be treated as capital gains in the hands of the foreign partners. What are much less clear are the following issues. AS the non-US investors will profit also from the "pass-through" system, they will be taxed as such: 5. If they received dividends/coupon, they would be taxed at the 30% level, unless they could claim a better rate thanks to a tax treaty between their residence country and the US. 6. If they get CAPITAL GAINS (on stocks and on futures), they would be taxed 'accordingly'. But what does that mean exactly? In theory, they would have to pay taxes on "capital gains" depending on their residence country, that is to say they would pay the same rate as if they invested in a fund their own country or in an 'offshore fund' (Cayman fund...) I saw several comments here and there arguing that the non-US investors would not have to pay anything to the IRS as they are not US residents, so they would simply pay their taxes to their home country directly. (sounds great...) But I also heard that they would have to pay 30% of the capital gains to the IRS as Effectively Connected Income (ECI), and then they COULD get a refund of some taxes if they claim that a tax treaty exists between the US and their residence country. That would mean that: - the real distributions of cash the LP makes to the foreign partners are taxed directly at the LP level (even if a 'pass-through' entity). That would be the only case where the L.P. would have to pay Federal taxes. - the non-US investors would receive less than the non-US investors (as they would receive 'net income after US tax'), BUT they could ask for some refund if there is a fair tax treaty between the US and their home country. If true, that could mean that: 1. The US hedge fund established as a partnership should not want to accept non-US investments as they would be taxed directly, which would be at least a paper burden (they would need to calculate the taxes linked to their foreign investors, and so on...), and at worst, a "performance burden" (Could these taxes reduce the performances they show, as they would have earned 'less money' because of the IRS tax?) 2. The non-US investors (individual or company) will not want to invest in any US hedge fund, as they would be taxed heavily by the US IRS (30% on any capital gain), and they could get their refund ONLY MORE THAN A YEAR later after claiming the tax treaty rate). Does anyone know the real rules which apply to the ECI? (I found only the following link on GTT, in the middle of this webpage) http://www.greencompany.com/EducationCenter/GTTRecTraTypNonResident.shtml What do you know about all that? What are you sure of regarding international investment in a US hedge fund? Does any US manager here has already had non-US investors on their US LP/US LLC (either build as a commodity pool or a stock hedge fund)? Thanks a lot for your answers. Please do not hesitate to PM me if you want to remain anonymous. Laurent NB: I understand that a 'simple' answer would be 'I would advise a European investor to invest only in an offshore fund', but that is not really the point, even if it may be the final conclusion.