A blocker corporation is a taxable entity (typically a C-corporation) interposed between a fund and certain investors to block pass-through income that would create tax problems.
Why It Matters
Tax-exempt investors use domestic blockers to avoid UBTI. Foreign investors use offshore blockers (often Cayman entities) to avoid ECI and U.S. filing obligations. The blocker holds the LP interest, pays corporate tax on fund income, and distributes after-tax proceeds to its shareholders as dividends. This structure converts problematic pass-through income into a form that does not create tax complications for the investor.
Key Details
- Blockers add cost and complexity: formation, maintenance, and corporate tax returns.
- Only justified when the tax exposure they prevent is meaningful.
- Domestic blockers are used by tax-exempt investors to shield UBTI.
- Offshore blockers (often Cayman) are used by foreign investors to avoid ECI.
- The blocker pays corporate-level tax, which reduces the net return to the investor.
Capital Company administers blocker entities alongside fund entities, handling corporate-level accounting and coordinating tax reporting between the fund and its blocker structures.
This content is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult qualified counsel for guidance specific to your situation.