The new tax law makes a simple conversion to a C-corp an unattractive option for Lazard Ltd, executives said during an earnings conference call.
Lazard Chairman and CEO Kenneth Jacobs said the company still prefers converting to a C-corp from a publicly traded partnership, but the tax reform act makes it more economical for Lazard to keep its current structure.
The new tax law is expected to lower Lazard's annual tax rate by approximately 200 basis points to 300 basis points. Jacobs said the lower rate helps make the company's current structure more resilient, and Lazard was "pleasantly surprised" to see the benefit.
"We were also somewhat surprised by the difficulty that [the law] created in terms of converting to a C-corp and the cost involved in doing that," he said.
Lazard hoped tax reform would create a pathway to a relatively simple conversion, CFO Evan Russo said, but provisions within the law would lead to a significantly higher tax rate if the company pursued a straightforward conversion. For instance, the company would face double taxation on non-U.S. earnings in part because net operating loss balances would limit Lazard's ability to use foreign tax credits, Russo said. He added that expansions to the foreign income tax category would lead to certain income not currently taxed in the U.S. becoming subject to such charges. That and other factors would increase Lazard's effective tax rate by approximately 10 percentage points.
"Net, net, the impact of U.S. tax reform is a significant benefit to our tax rate under our current structure and a significant detriment to our tax rate were we to convert to a C-corp," Russo said.
The Treasury Department and IRS are expected to provide guidance on many items related to tax reform, and Lazard will explore alternatives that could benefit the company, Russo said. Meanwhile, Lazard is still open to a conversion, according to Jacobs.
"But it's going to require a lot more study, and also it's much more complex to achieve," he said.
