If there are US shareholders of the offshore fund, those shareholders may be subject to passive foreign investment company ("PFIC") taxes. In such cases, the fund may undertake to provide to such shareholders US tax information.

Any US person that is a shareholder in a PFIC may elect to treat the PFIC as a qualified electing fund ("QEF"). Any US shareholder that makes the QEF election will be currently subject to tax on the US shareholder's pro rata share of the PFIC's net capital gain and ordinary earnings for the year ending in the taxable year of the shareholder. The US shareholder's pro rata share of net capital gain and ordinary earnings is calculated by the PFIC. This information must be included in a PFIC annual information statement that is sent to any US shareholder who makes a QEF election. If a QEF election is not made, the US shareholder's subsequent gain on the disposition of its PFIC shares will be subject to an interest charge. Furthermore, all accumulated gain or loss on the stock will be treated as ordinary. As an alternative to the QEF election, US shareholders may elect, under some circumstances, to mark to market all their PFIC holdings. This election will also result in the recognition of ordinary income but has the benefit of no additional interest charge. See Asset Management Tax Alternatives Alert 2008-2 for a discussion on the changes to filing requirements for US investors in a domestic entity with PFIC investments where a QEF has been elected.

Although offshore funds are generally tax exempt, potential tax issues may arise related to effectively connected income ("ECI"). Certain types of investments (e.g., loan origination) may not qualify for the safe harbor and the IRS could argue that the offshore funds income may be subject to tax. Other investment categories (e.g., master limited partnerships (MLPs) or real estate) may also create tax issues. Additionally, tax withholdings, both US securities and securities of other jurisdictions, owned in offshore funds often raise significant issues. Tax specialists should be consulted when material questions of interpretation arise.