In addition to tax exempt individuals, foreign investors have also used blocker corporations.
By comparison, a fund set up as a C Corporation would be subject to tax for its earnings, and then the limited partners would be subject to tax when they received their profit in the form of dividends distributed by the corporation.
Thus, the LLC or LP format allows a fund to avoid double taxation.
[2] For tax exempt investors, dividends, royalties, rents, capital gains and interest income are not considered UBTI, but any money earned from conduct unrelated to the entity's tax exempt purpose is considered UBTI.
In both cases, because partners are treated as earning their share of the partnership's income on a flow-through basis, they are treated as engaged in a U.S. trade or business or an unrelated business to the extent that the partnership is so engaged.