California to Impose Tax on Fees Paid to Non-Resident Asset Managers

Long-in-the-making regulations (the “Regulations”) have now been finalized, imposing California income tax on asset management fees, even if neither the asset manager nor any fund it manages has any presence in the state. Under the Regulations, an asset manager based outside California that receives fees for its services will be subject to California income tax on net income in proportion to the fees received from California-resident investors.

For more detail on the Regulations, please see our prior Client Alert describing the Regulations as proposed in late 2024 (the “Proposed Regulations”). Please note that unlike the Proposed Regulations, the Regulations will be effective for tax years beginning on or after January 1, 2026, rather than on a retroactive basis. Otherwise, the Regulations and the Proposed Regulations are substantively consistent with each other.

O’Melveny will monitor further developments related to the Regulations. Please contact the attorneys listed on this Client Alert or your O’Melveny counsel if you have any questions.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Billy Abbott, an O’Melveny partner licensed to practice law in California and New York; and Luc Moritz, an O’Melveny partner licensed to practice law in California, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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