In this series. Fourteen positions is a count of corporations. A QEF election at the top does not retire the lower ones. Partnership classification can. It is available only on the terms in the liability clause and, if classification is already relevant, an elective change. The practice page is Cayman funds.
If the lower-tier funds are classified as partnerships rather than as corporations, they are not passive foreign investment companies. Their income is income of their partners. Where the partner is the upper-tier fund, that income is included in the upper fund's own computation, and a single qualified electing fund election for the upper fund can pick it up. One election, one inclusion, one information return at that tier. The figure of fourteen is an illustration of the count. The arithmetic is the same at eight or at forty.
A partnership is outside section 1297
Section 1297(a) applies to a foreign corporation. A business entity classified as a partnership under Treasury Regulation section 301.7701-3 is not a foreign corporation for this purpose, and it is not a PFIC. Nothing in the attribution rules of section 1298 creates a PFIC out of a partnership. Those rules attribute stock of a PFIC owned by a partnership to the partners. They do not treat the partnership itself as the PFIC.
The direction of the classification matters. Classifying the upper feeder as a partnership, while the portfolio funds remain foreign corporations, does not collapse the lower-tier elections. The partners of that feeder are then the shareholders of each lower-tier PFIC, directly or by attribution, and each of those PFICs still needs its own election. The collapse described here happens when the lower-tier funds are the partnerships.
The upper fund, if it remains a foreign corporation and meets the income or asset test, is still a PFIC. Its U.S. holders still have one election at that level. What they no longer have is a separate election for each portfolio fund that has ceased to be a corporation. The income those portfolio funds earn is in the upper fund's ordinary earnings and net capital gain, computed under U.S. income tax principles, which is what the annual information statement has to report.
The data work consolidates
The upper fund's numbers still have to be built from what the lower tiers produce. Partnership classification changes which vehicle is a PFIC. It does not create books, and it does not compute earnings and profits. The statement at the top is only as good as the information the lower vehicles must deliver. That delivery is a documentary condition, discussed in information rights.
Partnership classification has its own information returns for U.S. persons who are partners. That filing is separate from a qualified electing fund statement. The tax adviser prepares it. This note does not describe it.
Not every stack can do this
A foreign eligible entity defaults to partnership only if it has two or more members and at least one member does not have limited liability. Otherwise the default is a corporation, and partnership classification requires a valid election. An entity that section 301.7701-2 treats as a corporation per se is not an eligible entity and cannot elect. Where classification is already relevant, section 301.7701-3(a) keeps the existing classification in place until an election, and an election that changes it carries the deemed liquidation and contribution in paragraph (g). Doing this to a stack of existing corporate funds is not a consolidation entry. It is a set of elective changes, and someone has to know which holders are U.S. persons before they are made.
Local law may not allow a liability regime that produces a partnership default, and an amendment can have consequences for existing holders under that law. Those are questions for counsel in each vehicle's jurisdiction. We do not conclude that a given fund can make the change, and we do not conclude that it should. Where a lower vehicle stays a corporation, the separate election in the tiering note remains.
Recalde Law Firm, P.A. is a Florida law firm with an office in Miami, Florida. We advise on United States law only. We do not practice Cayman law (or the law of any other country). Formation of a Cayman (or other non-U.S.) vehicle, Cayman legal advice, and CIMA registration stay with qualified Cayman counsel. We coordinate; we do not replace them. This is general information, not an offer of fund interests, and not Cayman legal advice.
The firm works on the U.S. structure and documents. The tax adviser prepares the returns and models the numbers.