Understanding AIF Tax Treatment: Category II vs III

Pass-Through vs Non Pass-Through

Alternative Investment Funds (AIFs) are taxed differently based on their category. Category II AIFs (Private Equity, Private Credit) enjoy a pass-through status, meaning the trust is not taxed; instead, the income is taxed directly in the hands of the investor at their applicable rates.

In contrast, Category III AIFs (Long-Short, Hedge Funds) are generally taxed at the fund level as an Association of Persons (AOP) at the maximum marginal rate. Understanding these nuances is vital for calculating true post-tax returns.