The US plan to tax global sovereign wealth funds could trigger a new wave of capital flight.

According to Mars Finance, on January 16th, US authorities proposed a major reform that could require sovereign wealth funds to pay taxes on their investments in the US, impacting some of the largest investors in the US private equity industry. The IRS released a proposal in December to amend provisions in the Internal Revenue Code related to sovereign wealth funds and some public pension funds applying for US tax exemptions. This is the latest in a series of policies implemented by the Trump administration that have prompted sovereign wealth funds to diversify their US investment exposure. In this proposal, the IRS will broaden the definition of "business activity" to include some activities previously considered investments. These changes will affect situations where sovereign wealth funds provide loans to businesses and make direct equity investments in private companies. Under the new proposal, activities that could potentially incur tax liabilities for sovereign wealth funds include direct lending to businesses and playing a role in bond default restructuring. These changes could also affect so-called "blockers," special purpose vehicles (SPVs) typically used by sovereign wealth funds and pension funds when jointly investing in portfolio companies with private equity firms through co-investment structures. (Jinshi)