This article originally appeared in the May 2026 issue of The Tax Adviser.
Many investment funds employ an economic arrangement in which the general partner receives a carried interest and the management company, which often shares common ownership with the general partner, is compensated for its services via a management fee. This management fee is intended to cover the operating expenses of the management company such as legal costs, administrative fees, and salaries. Although many managers collect this fee from the fund on a periodic basis, there may be a business reason for the manager to forgo the collection of this fee. In these instances, the manager may waive the management fee in exchange for an interest in the fund’s profits (an “additional interest”).
Where the management fee is waived and the management company is issued an additional interest in exchange for services (i.e., the management company is a service provider to the fund), the question arises as to the appropriate treatment of this arrangement for tax purposes.
BDO’s Alexaner Salgat provides details in the full article in The Tax Adviser.