Over the last 24 months, we have seen a significant increase in the number of co-investment transactions in the private equity (PE) and infrastructure sectors globally.
This growth reflects a strategic response from fund managers and investors to the tougher dealmaking environment and financial turbulence of the past few years. Co-investments provide a vital option for funds at a time when higher interest rates make debt financing for buyouts expensive and hard to come by. The strategy also helps managers continue to deploy capital and build their portfolios in today’s difficult fundraising landscape.
In our article The rise of the co-investment: key tax considerations for fund managers and investors we examine the key differences between co-investment transactions when compared to traditional M&A and Limited Partners (“LPs”) investments, and highlight the tax considerations that need to be acknowledged as part of the process.
In 2013 and 2014, the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) were introduced into the legal frameworks of various jurisdictions to combat global tax avoidance and increase transparency. Both these Automatic Exchange of Information (AEOI) regimes work on a similar model, requiring financial institutions to report information including account balances for any reportable account holders that they hold.
While FATCA is concerned only with US citizens that hold foreign (i.e. non-US) assets in participating jurisdictions, the CRS requires all financial institutions in participating jurisdictions to share information about their account holders in other reporting countries. There are, however, other differences.
A decade on from the implementation of FATCA and the CRS, we ask the question, have these regimes lost their shine? To delve into how these frameworks have changed the due diligence, compliance, and reporting obligations for financial institutions in the investment fund industry, please read our article on FATCA and CRS compliance for investment funds.
Members of LLPs may be pleased to find out that the Upper Tribunal (UTT) has upheld the First-tier Tribunal’s decision (FTT) in BlueCrest Capital Management (UK) LLP v HMRC, which is the first case that considered the salaried member rules in the context of an asset management LLP. For more information, please refer to our summary and key takeaways of the case.
Broadly, the UTT and FTT’s decisions support that members of LLPs do not need to have “significant influence” (Condition B) over all the LLP’s affairs i.e. members could have financial influence, rather than managerial influence. We will shortly be releasing a more detailed update on the UTT case. It is yet to be seen whether HMRC will further challenge these decisions, and how they will apply the decisions in practice to other cases.
The UK’s 2023 Autumn Statement will take place on 22nd November 2023. It is yet to be seen whether tax cuts will be made considering inflation. There are some initiatives which we expect to receive updates on relating to R&D corporation tax reliefs, a new framework for lending and staking cryptocurrency, and an update on the Tax Administration Framework Review (“TAFR”) which focuses on how HMRC’s information and data-gathering powers could be approved etc.
The European Commission has published a proposal for a common corporate tax framework called ‘Business in Europe: Framework for Income Taxation,’ otherwise known as “BEFIT”. BEFIT aims to introduce a common framework for corporation tax for EU based entities, in order to simplify the tax environment within the EU, enhance certainty and reduce compliance costs, and create greater fairness and transparency. If adopted by the European Council, the proposal is expected to come into force on 1 July 2023.
Broadly, BEFIT applies to EU tax resident companies and EU located permanent establishments. For multinational groups with operations in the EU and an annual combined revenue of at least 750 million euros in at least 2 of the last 4 tax years, the application of BEFIT is mandatory.
In line with Pillar 2, we do not expect that investment funds should generally not be adversely impacted by BEFIT. The proposal should be scrutinised as it progresses