U.S. Carried Interest Regulations Delayed for Second Review

On June 2, 2020, the long-awaited carried interest proposed regulations were returned to the Office of Management and Budget (OMB) for a second round of review.  The OMB’s Office of Information and Regulatory Affairs (OIRA) previously completed its review of the proposed regulations on February 27, 2020 and the funds and alternative investments industry has been eagerly been awaiting their release ever since.  The reason for the additional round of OMB review is unknown, although the move suggests that changes to the previously-reviewed regulations may be forthcoming prior to their release.

A carried interest generally refers to a profits interest a partnership that is issued in connection with the performance of services.  The 2017 Tax Cuts and Jobs Act introduced a 3-year holding period requirement for carried interests in partnerships that engage in making and managing investments. Under the new rules, a partner generally must hold its interest for more than three years to qualify for long-term capital gain treatment.  The holding period requirement has applied for taxable years beginning after December 31, 2017.  However, practitioners and the private funds industry have been awaiting further guidance on several open questions as to how the three-year holding period applies, including in the context of REIT capital gain distributions and situations where the holding period for the partnership interest does not align with the partnership’s holding period for an underlying asset, the sale of which gives rise to carried interest. The Private Equity, Funds & Investment Management team at Mayer Brown will provide observations on the proposed regulations upon their release.

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