Fractal Logic: New IRS PLR Provides Tax Guidance for Private Credit Transactions

Facts Described in the PLR
The super-tax exempt (referred to as the “Originator”) makes loans to non-U.S. borrowers to provide capital to needy persons in developing countries and not for the purpose of making a profit. The Originator maintains a U.S. office from which it makes such loans. The Originator seeks private capital to fund the making of such loans. The Originator bifurcates the loans that it makes into “A” and “B” tranches. The PLR recites that the tranching leaves the credit risk inherent in the loans pari passu. The Originator then sells participations in both of the A and B tranches in private market transactions. In all cases, the Originator retains the loan servicing.

The Originator has formed a non-U.S. corporation (Entity-1). The PLR recites that the equity in Entity-1 has nominal value, no rights to participate in Entity-1 profits or losses and is held by a third party (likely a nominee). Entity-1 is not entitled to the Originator’s super-tax exemption or, apparently, the benefits of any tax treaty. It appears likely that Entity-1 is a Cayman Islands private company.

Entity-1 purchases participations in the A and B loans made by the Originator. The participations represent less than all of the cash flows on the loans, that is, the Originator retains a “substantial portion” of each loan. The participations do not provide creditor rights to Entity-1 and allow the Originator to modify the loans in its discretion (and to the detriment of the participation holder). Nonetheless, the PLR recites that the participations transfer tax ownership to Entity-1 of the portion of the loans represented by the participations. Entity-1 obtains the cash to purchase the participations by selling debt obligations (the “Notes”) to third-party investors.

The Notes are credit-tranched. Specifically, the most secure Notes (referred to as “Rated Notes”) are investment-grade and are rated. The Rated Notes are credit-supported by first-loss Subordinated Interests that take the form of equity in the loans. For example, Entity-1 could purchase a $100x loan by issuing a $70x Rated Note to a third party and a $30x Subordinated Interest in the loan. The PLR recites that Entity-1 “expects to retain a portion of the Subordinated Interests indefinitely.” The PLR further states that the Originator holds the loans in its own name and does not hold itself out as making loans on behalf of Entity-1.

Tax Issue Addressed in the PLR
The federal income tax issue addressed by the PLR will be familiar to every tax practitioner working in the private credit arena. Specifically, the PLR addresses whether Entity-1 will be treated as engaged in the conduct of U.S. trade or business by reason of its purchase of participations, that is, undivided interests in the loans made by the Originator. And while the IRS’s conclusion that Entity-1 is not engaged in the conduct of a U.S. trade or business was influenced by factors not directly relevant to taxable private credit investors, following the geometric patterns through the layers in the PLR, relevant guidance can be discerned.

Entity-1 would be considered to be engaged in the conduct of a U.S. trade or business if the activities of the Originator’s U.S. lending office were attributed to Entity-1. The PLR correctly recites that the office would be attributed to Entity-1 only if the Originator were considered an agent that has and regularly exercises the power to conclude contracts on behalf of Entity 1 and if the Originator is not an agent of independent status acting in the ordinary course of its trade or business.^[3]The PLR then cites the following factors, inter alia, in holding that the lending office of the Originator should not be imputed to Entity-1 (observations in italic):

1. 1. The Originator retains all servicing rights and decision-making authority with respect to the loans subject to the participations. The Originator may agree to loan modifications that are not in the best interests of Entity-1 as a participation holder. Concomitantly (although listed as separate factor), the Originator deals with borrowers as a principal for its own account.

In the author’s experience, participation holders generally do not obtain direct creditor rights and must act through the participation seller. While a private credit market participation seller is not a fiduciary to the participation holder, the seller would face substantial resistance if it acted in a manner adverse to the interests of the holder of the participation. Since the market for private credit participations would not tolerate the lender acting in a manner adverse to the participation holders, this factor is unlikely to be present in market transactions.

2. Entity-1 has hired a third-party collateral manager to hold and administer the participations.

It is not clear to the author why the hiring of a third-party collateral manager to receive payments on the participations bears on whether the participation holder should be, or not be, attributed with the Originator's lending office. The use of a third-party collateral manager does illustrate that Entity-1 is a passive investment vehicle and may not otherwise be engaged in trade or business activities.

3. The Originator and Entity-1 are legally independent of each other.

In the private credit market, this is always true. The PLR glosses over the fact that the equity in Entity-1 does not have an economic interest and that the Originator is a “holder of certain equity interests in Entity 1.”^[4]From what can be discerned from the PLR and applied to the private credit market, the fact that an affiliate of a loan originator serves as the general partner of a fund that purchases private credit loans from the originator should not create a presumption that the activities of the originator are imputed to the fund, provided that corporate formalities are observed. Of course, other facts could establish that a loan originator is a dependent agent of a participation purchaser, including pre-funding and participation in negotiations.

4. The Originator is not economically dependent on Entity-1 for capital.

This fact was established by the Originator’s long history of placing the A and B loans with third parties. Tax practitioners in the private credit markets are very focused on this fact. It is important that the loan originator have, and take advantage of, multiple avenues to sell loans in order to be able to successfully assert that a particular loan buyer was not using the originator as a shield to avoid being treated as engaged in the conduct of a U.S. trade or business itself. Concomitantly, the originator should possess sufficient capital to hold the loan for a reasonable period of time.

5. Entity-1’s economic relationship will be with the borrowers under the loans, not with the Originator.

The author is flummoxed by this statement in the PLR and the IRS’s acceptance of the representation that participations transferred tax ownership. The IRS went out of its way in multiple instances to state that the participations do not provide a participant with any rights to exercise creditor remedies or object to loan modifications made by the Originator that could harm a participant. Given these facts, it seems anomalous to then state that the participant does not have a continuing economic relationship with the Originator. In the author’s view, Entity-1 should not be attributed with a U.S. trade or business even if the participations create deemed partnerships between the Originator and Entity-1. It is not clear how the IRS did not even discuss that a deemed partnership could exist for tax purposes.

Concluding Observations
The facts of the PLR address a unique fact pattern but offer some guidance for taxable participants in the private credit markets given that it addresses the tax considerations for a private company not entitled to the benefits of an income tax treaty or any statutory tax exemption. The IRS has made clear that retained servicing rights and the retained ability to deal directly with borrowers are a key indicium of the fact that a loan originator is not acting on behalf of a secondary market purchaser. Likewise, the fact that the originator has multiple offtakes is a key factor in holding that a particular participation purchaser did not use the originator as a shield to hide its own loan origination activities.

As noted above, however, the PLR may not offer sufficient depth to make sense of all of the factors that the IRS considered in holding that the loan origination activities of the Originator should not be imputed to Entity-1. Nonetheless, as practitioners continue to delve into the depths of the cross-border tax nuances of the private credit markets, IRS insight on how the systems should be operated is welcome (even if provided fractally).

The author expresses his gratitude to Anette Maier, managing director and head of Private Markets Tax at Allianz Capital Partners GmbH, for her insightful market comments on the content of this white paper. Mistakes and omissions, however, remain the sole responsibility of the author.

^{[1] PLR 202536015 (September 5, 2025).}

^{[2] See Section 892(b) of the Internal Revenue Code of 1986, as amended (the “Code”).}

^{[3] Treas. Reg. § 1.864-7(d).}

^{[4] But see Treas. Reg. § 1.864-7(d)(3)(ii) (stating that the fact that the U.S. agent is owned by a foreign principal, in and of itself, does not result in the U.S. agent being treated as a dependent agent.)}