California Market-Based Sourcing Regulations: Effect On Asset Managers

The California Franchise Tax Board has recently finalized new regulations¹ regarding asset management services provided to persons domiciled in California by an asset manager, even if the asset manager has no presence in California.

Under these new California tax regulations, fees earned from "asset management services" will be sourced to California for state income tax purposes in proportion to the fees received from direct investors domiciled in California and from "beneficial owners" domiciled in California, using a look‑through approach. "Beneficial owner" is defined as any person who made an independent decision to invest assets, meaning a person who was not required or committed to do so by contract, by agreement, or by any other arrangement, understanding or relationship except pursuant to law. The term does not include master funds, feeder funds, similar pooling vehicles, a shareholder of a publicly-traded company whose board makes investment decisions, or a