Are offshore feeder (Spoke) funds doing business in New York merely by being partners in a New York-present master (Hub) fund that only trades securities or commodities for its own account?

Plain-English summary

CitiFunds (a Citibank-advised hub-and-spoke fund complex) asked whether its offshore "Spoke" feeder funds -- alien entities -- are doing business in New York merely because they are partners in a "Hub" master fund partnership that is present in New York City, where the Hub fund only invests or trades for its own account. It also asked about board/committee meetings in New York and about New York City's unincorporated business tax (UBT) self-trading exemption.

The Department held the offshore Spoke funds are not doing business in New York:

• Issue 1 (self-trading exemption): Under section 209.2-a, an alien Spoke fund is not deemed to be doing business, employing capital, owning/leasing property, or maintaining an office in New York by virtue of being a partner in a New York City Hub fund partnership whose only activities are investing or trading in stocks or securities for its own account (IRC 864(b)(2)(A)(ii)) or in commodities for its own account (IRC 864(b)(2)(B)(ii)).
• Issue 2 (meetings): Holding board or committee meetings in New York City -- by the fund or by the Hub partnership -- does not create nexus under section 209.1.
• Issue 3 (NYC UBT): The Department cannot opine on the NYC UBT self-trading exemption (it does not administer NYC's UBT), but for section 209.2-a purposes it looks to IRC 864(b)(2)(A)(ii)/(B)(ii) and the regulations (defining "securities," "commodities," "derivative"). If the items qualifying for the NYC UBT self-trading exemption also qualify under those IRC provisions, the section 209.2-a exclusion applies.

What this means for you

The self-trading exemption protects offshore feeders in a master-feeder structure

A foreign feeder fund is not doing business in New York just because its master fund trades for its own account from New York. Section 209.2-a (mirroring the federal 864(b)(2) trading safe harbors) keeps the feeder outside Article 9-A.

Directors' meetings in New York are not nexus

Holding board or committee meetings in New York City -- a common practical need -- does not, by itself, make a fund subject to the franchise tax.

The exemption tracks the federal trading safe harbors

The scope of "trading in stocks or securities / commodities for its own account" is read by reference to IRC 864(b)(2) and its regulations. Aligning the fund's activities with those provisions is how the section 209.2-a exclusion is secured.

Common questions

Q: Is an offshore feeder fund doing business in New York by investing through a New York master fund? A: No, where the master fund only trades securities or commodities for its own account -- the section 209.2-a self-trading exemption applies.

Q: Do New York board meetings create nexus?
A: No. Holding board or committee meetings in New York City does not subject the fund to the franchise tax.

Q: Does the opinion address the New York City UBT exemption? A: No -- the Department does not administer the NYC UBT. But it looks to IRC 864(b)(2) and its regulations to define the section 209.2-a self-trading exclusion.

Citations and references

Statutes, regulations, and authorities:

• Tax Law section 209.1 (Article 9-A franchise tax; doing business)
• Tax Law section 209.2-a (self-trading exemption; trading in stocks/securities/commodities for own account)
• Internal Revenue Code section 864(b)(2)(A)(ii) (trading in stocks or securities for own account)
• Internal Revenue Code section 864(b)(2)(B)(ii) (trading in commodities for own account)
• CitiFunds, TSB-A-00(7)C (Apr. 3, 2000)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2000.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a00_7c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-00(7)C
Corporation Tax
April 3, 2000

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C991201B

On December 1, 1999, a Petition for Advisory Opinion was received from CitiFunds1, c/o Ronald P. Cima, Esq., Greenberg Traurig, 200 Park Avenue, 15th Floor, New York, New York 10166. The issues raised by Petitioners, CitiFunds, are:

1. Whether a non-U.S. fund, such as a Cayman or Irish fund, described below as a
   “Spoke fund” or feeder fund, would be deemed to be doing business, employing capital, owning or leasing property or maintaining an office in New York State by virtue of the fact that it is a partner in a partnership which is present in New York City, described below as a “Hub fund”, but whose only business activities are investing or trading stocks, securities or commodities within the meaning of the exclusion described in section 209.2-a of the Tax Law.
2. Whether the non-U.S. Spoke funds, as described below, could continue to be
   exempt from New York taxation if such non-U.S. Spoke funds, as well as the Hub funds, as described below, were to hold some or all of the board, investor and committee meetings in New York City.

1

The collective name for the following 18 funds. Three of the funds are: Asset Allocation Portfolios; Cash Reserve Portfolios; and The Premium Portfolios. The address for these funds is: c/o Signature Financial Group (Cayman) Ltd., P.O. Box 2494, Elizabethan Square, George Town, Grand Cayman, Cayman Islands, British West Indies. The other 15 funds are : Citi Emerging Asian Markets Equity Portfolio, Ltd.; CitiFunds Balanced Portfolio, Ltd.; CitiFunds Growth & Income Portfolio, Ltd.; CitiFunds Institutional Liquid Reserves, Ltd.; CitiFunds Intermediate Income Portfolio, Ltd.; CitiFunds International Growth Portfolio, Ltd.; CitiFunds Large Cap Growth Portfolio, Ltd.; CitiFunds Liquid Reserves, Ltd.; CitiFunds Premium Liquid Reserves, Ltd.; CitiFunds Short-Term U.S. Government Income Portfolio, Ltd.; CitiFunds Small Cap Growth Portfolio, Ltd.; CitiSelect Ltd Folio 200; CitiSelect Ltd Folio 300; CitiSelect Ltd Folio 400; and CitiSelect Ltd Folio 500. The address for these funds is: c/o Maples And Calder, P.O. Box 309, Ugland House, George Town, Grand Cayman, Cayman Islands, British West Indies.

-2TSB-A-00(7)C
Corporation Tax
April 3, 2000

3. Whether investors in stocks, securities and commodities, who invest only in
   property qualifying for the self-trading exemption from New York City’s unincorporated business tax, as defined in section 11-502(c)(1)(a) of the New York City Administrative Code – property qualifying as investment capital (stocks, bonds and other securities), other stocks, notes, bonds, debentures and other evidences of indebtedness; interest rate, currency or equity notional principal contracts; foreign currencies; interests in or derivative financial instruments (including options and forward or futures contracts, short positions and similar financial instruments) in such property; and publicly traded commodities – are investing or trading stocks, securities or commodities for purposes of the exclusion provided in section 209.2-a of the Tax Law. Petitioners submit the following facts as the basis for this Advisory Opinion. Petitioners are a mutual fund family, with assets of approximately $15 billion, which uses the Hub and Spoke2 master-feeder investment fund structure. This structure consists of New York common law trusts that are treated as partnerships for federal income tax purposes. The trusts, known as Hub funds, each hold a portfolio of securities (and some commodities) that may consist of several series. The regulated investment companies (or mutual funds) and Cayman Island or Irish mutual funds (all of which are known as Spoke funds or feeder funds) are investors in the Hub funds. The investors are treated as partners for federal income tax purposes. The three Hub funds and their series are:
4. Asset Allocation Portfolios (“AAP”) includes the following series:
   Short-Term Portfolio
   Intermediate Income Portfolio
   Foreign Bond Portfolio
   Small Cap Value Portfolio
   Large Cap Value Portfolio
   International Portfolio
   2.Cash Reserve Portfolios (“CRP”)

2

Hub and Spoke is a registered service mark of Signature Financial Group, Inc. The terms, “Hub” and “Spoke”, also are registered service marks of Signature Financial Group, Inc.

-3TSB-A-00(7)C
Corporation Tax
April 3, 2000

3.The Premium Portfolios (“TPP”) includes the following series: Emerging Asian Markets Equity Portfolio Balanced Portfolio Growth & Income Portfolio U.S. Fixed Income Portfolio International Equity Portfolio Large Cap Growth Portfolio Government Income Portfolio Small Cap Growth Portfolio High Yield Portfolio Petitioner states that the 15 Spoke funds, which are the non-U.S. offshore funds, meet the definition of a corporation for purposes of section 208.1 of the Tax Law. Petitioners also state that the Spoke funds’ only business activities in New York are investing or trading stocks, securities or commodities for their own account, through their investments in the Hub funds, within the meaning of section 209.2-a of the Tax Law. The Spoke funds and the Hub fund in which each invests are: Spoke Fund Citi Emerging Asian Markets Equity Portfolio, Ltd. CitiFunds Balanced Portfolio, Ltd. CitiFunds Growth & Income Portfolio, Ltd. CitiFunds Institutional Liquid Reserves, Ltd. CitiFunds Intermediate Income Portfolio, Ltd. CitiFunds International Growth Portfolio, Ltd. CitiFunds Large Cap Growth Portfolio, Ltd. CitiFunds Liquid Reserves, Ltd. CitiFunds Premium Liquid Reserves, Ltd. CitiFunds Small Cap Growth Portfolio, Ltd. CitiSelect Ltd Folio 200 CitiFunds Short-Term U.S. Government Income Portfolio, Ltd.

Hub Fund
Series of the TPP
Series of TPP
Series of TPP
CRP
Series of TPP
Series of TPP
Series of TPP
CRP
CRP
Series of TPP
Several series of AAP and TPP
Series of TPP

Citibank, NA is the investment advisor for each of the Hub funds and is also the subadministrator for those Hub funds where the investment manager’s contract does not cover administrative services. The custodian and certain other service providers also are present in New York City for each of Petitioner’s Hub funds.

-4TSB-A-00(7)C
Corporation Tax
April 3, 2000

Discussion
Section 208.1 of the Tax Law provides that a “corporation” includes (a) an association within the meaning of 7701(a)(3) of the Internal Revenue Code (including a limited liability company), (b) a joint-stock company or association, (c) a publicly traded partnership treated as a corporation for purposes of the Internal Revenue Code, pursuant to section 7704, thereof and (d) any business conducted by a trustee or trustees wherein interest or ownership is evidenced by certificate or other written instrument. Section 209.1 of the Tax Law imposes, annually, a franchise tax on every corporation for the privilege of exercising its franchise, or of doing business, or of employing capital, or of owning or leasing property in New York State in a corporate or organized capacity, or of maintaining an office in New York State for all or any part of each of its fiscal or calendar years. However, section 209.2-a of the Tax Law provides that an alien corporation shall not be deemed to be doing business, employing capital, owning or leasing property, or maintaining an office in this state, for the purposes of Article 9-A of the Tax Law, if its activities in this state are limited solely to: (a) investing or trading in stocks and securities for its own account within the meaning of section 864(b)(2)(A)(ii) of the Internal Revenue Code (“IRC”), or (b) investing or trading in commodities for its own account within the meaning of section 864(b)(2)(B)(ii) of the IRC, or (c) any combination of activities described in paragraphs (a) and (b) above. For purposes of section 209.2 of the Tax Law an alien corporation is a corporation organized under the laws of a country, or any political subdivision thereof, other than the United States. Conclusion Issue 1: Pursuant to section 209.2-a of the Tax Law, none of the off-shore Spoke funds, listed above, which are alien entities, will be deemed to be doing business, employing capital, owning or leasing property or maintaining an office in New York State by virtue of the fact that the fund is a partner in a Hub fund partnership which is present in New York City, where the Hub fund’s only business activities are investing or trading in stocks or securities for its own account within section 864(b)(2)(A)(ii) of the IRC, or investing or trading in commodities for its own account within the meaning of section 864(b)(2)(B)(ii) of the IRC. Issue 2: Pursuant to section 209.1 of the Tax Law, none of the off-shore Spoke funds, listed above, will be deemed to be doing business, employing capital, owning or leasing property or maintaining

-5TSB-A-00(7)C
Corporation Tax
April 3, 2000

an office in New York State by virtue of the fact that a fund holds its board or committee meetings in New York City or that the Hub fund partnership, of which it is a partner, holds board or committee meetings in New York City. Issue 3: Since the New York State Department of Taxation and Finance does not administer New York City’s unincorporated business tax, we cannot opine as to whether investing in property qualifying for the self-trading exemption under New York City’s unincorporated business tax is “investing or trading in stocks or securities for its own account” or “investing or trading in commodities for its own account” for purposes of the exclusion provided by section 209.2-a of the Tax Law. However, with respect to what is meant by “trading in stocks or securities” or “trading in commodities” for purposes of the exclusion provided by section 209.2-a of the Tax Law, we would look to sections 864(b)(2)(A)(ii) and 864(b)(2)(B)(ii) of the IRC, respectively, and the regulations promulgated thereunder, such as section 1.864-2(c)(2) of the Treasury Regulations which defines “securities”, section 1.864-2(d) which describes a “commodity” and proposed regulation section 1.864(b)-1 of the Treasury Regulations which defines “derivative”. If the items qualifying for the self-trading exemption under New York City’s unincorporated business tax also qualify under sections 864(b)(2)(A)(ii) or 864(b)(2)(B)(ii) of the IRC and the regulations thereunder, then the exclusion in section 209.2-a of the Tax Law would apply.

DATED: April 3, 2000

NOTE:

/s/
John W. Bartlett
Deputy Director
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.