edu: how hedge funds avoid taxs

--Hedge funds, which control liquid pools of capital with little regulatory oversight, are a growing presence in the lending business.. Thedge funds increasingly take part in lending syndicates with traditional banks, often indrectly, aqnd also make riect loans, frequntly to riskier or smaller companies that may have difficulty obtaining traditional financing. --they use off-short affiliates and transactions designed to take advantage of a murky area in the tax law that differentiates between lending and inveting activities. --trick: passive foreign investor can avoid taxes on the profits. --the structures used by hedge funds to avoid U.S. taxes on lending activities take a variety of forms. One common structure: under American tax law, a foreign company with employees in the U.S. that makes loans in the U.S. generally owes federal corproate income taxes on the profits. But the law also says that if a foreign company is merely a passive investor or trader - as opposed to being actively engaged in a "trade or business" - it doesn't own any taxes on that income. --after making a loan, many domestic hedge funds wait between 30 and 90 days - a so called seasoning period - then sell the loan to an off-shore sister fund. Offshor fund isn's involved in the actual business of making loan. --extent: Hedge funds bought up $69.8 billion, or 23% of noninvestment grade syndicagted loans in the first half of 2007, up from 11% in 2005. --often, offhore hedge funds purchase slices of the loands shortly after the syndication deal is completed, generally waiting 48 hours before taking over responsibility for their slice of the loan. By waiting that time period, the funds argue that they aren't actually lenders, but merely foreign investors or traders purchasing loans in the secondary market and thus not taxable. --it could draw all of the offshor funds' income into the U.S. tax system..so it is vague.