Tax Distributions And Carry Clawback

Questions around tax distributions and carry clawback provisions in LPAs have come up in practice more often in recent months. We have written this Private Capital Solutions briefing to explore these topics in more detail.

Executive summary

Tax distribution provisions were originally designed to help individual carried interest holders manage tax liabilities that arise by reference to their holding of carried interest but before their receipt of distributions. The issue is particularly relevant for US taxpaying carry holders due to the accrual basis of taxation for carried interest in the US, contrasting with the distribution basis prevalent in other jurisdictions. Over time, these provisions have evolved and become more complex, and a diverse array of practices have developed, sometimes producing outcomes beyond their original purpose. Considering the significant commercial implications of tax distributions, including their effect on fund returns and the