The IRS has taken the position that a foreigner whose U.S. agent
regularly makes loans to the public on its behalf is engaged in a
U.S. trade or business and subject to U.S. net income tax. As a
result, most foreign CLOs (as well as credit funds with foreign
investors) generally comply with tax guidelines that prohibit their
U.S. managers from engaging in primary loan origination on their
behalves.
An exception to the prohibition on primary loan origination may
be available if (1) the CLO acquired a performing loan with no
expectation that the loan would default, (2) the loan subsequently
defaults or default becomes imminent, and (3) the manager
reasonably believes that an additional advance to the borrower
would protect the value of the CLO's investment. These types of
workouts are typical byproducts of being an investor, and arguably
do not give rise to a customer relationship reflective of a U.S.
trade or business.
