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George Soros May Face a Monster Tax Bill
Deferring income helped the billionaire hedge fund manager build his fortune
Excerpt
Originally published April 30, 2015 at 5:00am EST
George Soros likes to say the rich should pay more taxes. A substantial partof his wealth, though, comes from delaying them. While building a record as one of the world’s greatest investors, the 84-year-old billionaire used a loophole that allowed him to defer taxes on fees paid by clients and reinvest them in his fund, where they continued to grow tax-free. At the end of 2013, Soros—through Soros Fund Management—had amassed $13.3 billion through the use of deferrals, according to Irish regulatory filings by Soros.
Congress closed the loophole in 2008 and ordered hedge fund managers who used it to pay the accumulated taxes by 2017. A New York-based money manager such as Soros would be subject to a federal rate of 39.6 percent, combined state and city levies totaling 12 percent, and an additional 3.8 percent tax on investment income to pay for Obamacare, according to Andrew Needham, a tax partner at Cravath, Swaine & Moore. Applying those rates to Soros’s deferred income would create a tax bill of $6.7 billion. That calculation is based on publicly available information such as the Irish regulatory filings, which provide only a partial glimpse into Soros’s finances.The actual tax bill would be affected by factors specific to the billionaire.Soros declined to comment, according to Michael Vachon, a spokesman, as did Anthony Burke, an IRS spokesman.
Just before Congress closed the loophole, Soros transferred assets to Ireland—a country seen by some at the time as a possible refuge from the law. The filings show for the first time the extent to which Soros’s almost $30 billion fortune—he ranks 23rd on the Bloomberg Billionaires Index—came from finding ways to delay taxes and reinvesting the money in his fund. […]
The Story Behind the Story
When I wrote this story, a number of hedge fund managers had deferred fees through overseas companies that were subject to much lower taxation than those in the US. Congress closed this loophole in 2007, but gave money managers a ten-year window to pay taxes on the deferred fees. This deadline was about to expire, and I had been told that money managers were seeking ways to continue avoiding paying tax on the deferred fees, which were said to total as much as $200 billion industrywide.
I found documents in Ireland that showed George Soros had set up what was known as a Section 110 company in Ireland just before Congress voted to close the loophole. While it was unclear what this company did and how it fit into Soros’s money management operations, I could see that over time it had built up some $13 billion in deferred fees on its balance sheet.
Through interviews with tax lawyers and accountants, I found out that some firms had been pitching Irish Section 110 companies as an avenue to continue deferring taxes on hedge fund manager performance fees. I then had to learn how Section 110 companies operated and why it was thought that they might provide a workaround for US taxes on deferred compensation fees. I also had to study US deferred compensation rules and US tax treaties with various countries, which was a key component of the strategy (Ireland as I recall had a tax treaty with the US, which under the law passed by Congress provided an exemption to paying taxes on the deferred compensation. Other tax havens such as Bermuda and the Cayman Islands didn’t have a tax