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Publish Date

May 03, 2022

To Trade or Not to Trade? That is the Question

A&M Tax Advisor Update

The current M&A boom is showing no signs of slowing down and it’s easy to forget that two years ago, when Covid-19 first hit, M&A activity across several sectors came to an abrupt end (well, pause). Infrastructure M&A, however, remained largely unimpacted throughout the turbulent times.

There have been some landmark transactions in what has come to be known as the ‘passive infrastructure’ space, including the listing of Vantage Towers (a Vodafone subsidiary created in 2019 to house the telecom giant’s 80,000 plus European network towers) and Blackstone’s acquisition of QTS Realty Trust, the largest datacentre deal in history.

The passive nature of certain infrastructure assets means it is not always clear whether they are ‘trading’ for UK tax purposes.

The substantial shareholding exemption

It is common for financial investors to hold shares in infrastructure asset companies through a special purpose vehicle (“SPV”) in the form of a UK holding company (“UK Bidco”). On a future exit, UK Bidco may dispose of the shares it holds in the infrastructure company. To the extent a capital gain arises for UK Bidco, it could seek to apply the UK’s Substantial Shareholding Exemption (“SSE”) to exempt the gain from UK corporation tax.

There are multiple conditions that must be met for the SSE to apply. In this article, we have focussed on the trading condition (i.e. whether the asset being disposed of is a trading company or holding company of a trading group).

TCGA 1992, Schedule 7AC states that a trading company is “a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities”.

HMRC seeks to clarify what it considers to be ‘substantial’ in its CG53116 manual: “A company, group or subgroup whose non-trading activities amount to more than 20% of its total activities…. does not meet the trading requirement. Some or all of the following are among the indicators that might be taken into account…:

  • the level of turnover received from non-trading activities;
  • whether the value of non-trading assets was substantial in relation to the value of all assets;
  • the expenditure incurred or time spent by officers and employees on non-trading activities; and
  • the company’s history.”

HMRC goes on to explain that “…you should weigh up the relevance of each in the context of the individual case and judge the matter “in the round”.

The above can create some unwelcome uncertainty in respect of passive infrastructure assets. These assets are attractive to investors in part because they typically require very little active management, whilst generating stable, regular yields.

Set out below are some examples of such passive infrastructure assets, alongside some of the key considerations to be taken into account in determining whether such assets may meet the trading condition in order for the SSE to apply.


Datacentres have been one of the fastest growing sectors for investment in recent years. Covid-19 lockdowns have super-charged the growth of datacentres thanks to home-working, online shopping and entertainment streaming.

Whilst datacentres may start off as industrial shell buildings, significant capital expenditure is required in relation to back-up power, cooling equipment, generators and connectivity. The requirement for such expenditure, and the on-going maintenance, could be considered a helpful indicator of a trading company.

Another helpful indicator is that datacentre companies often have multiple customers and provide services to their customers in addition to the storage of data. The service offerings can be operationally intensive and require a significant workforce.

On the other hand, some datacentre companies provide only limited data storage services, with their location being their only valuable differentiator, and some datacentres may have only one customer on a long term contract.

Telecom towers

The number of transactions within the towers sector has grown in recent years, driven in part by large telecommunications companies carving out their tower assets into dedicated “Towercos”. Examples include Vodafone, Telia and Orange.

Towercos lease out space in their sites to wireless operators, usually under long term contracts that generate predictable revenue streams.

It is not uncommon for Towercos to have a limited number of customers. Often the predecessor telecommunications company that disposed of the Towerco may enter into a sale-and-leaseback transaction with the Towerco and be its largest / only customer. A limited customer base and limited management time can be unhelpful indicators when considering trading status.

However, some Towercos can host multiple tenants, each operating under different contracts, with significant management time and effort required to grow and expand the business. In addition, the tower assets require consistent upgrades and some Towercos often provide other services to their customers outside the traditional leasing contracts.

Whilst some ‘towers’ are typically fixed, other types of towers are more mobile (e.g. rooftop towers) and the portable nature of these assets could also be considered to be a helpful trading indicator.

Toll roads

Toll roads typically operate under a concession agreement with a government or local authority. Depending on the jurisdiction involved, the toll-road operator may or may not have ownership rights over the land itself.

The attractiveness of toll roads for infrastructure investors is that these concession contracts are typically long term. The form of payment received under the concession differs depending on the type of project. Under an availability-based concession, the toll road operator receives regular payments from the government authority as long as the asset is available for use in the manner and to the standard agreed with the government or local authority.

Other toll roads operate as demand based, or shadow toll projects; whilst there are certain differences between these, the common theme is that the level of payments varies depending on traffic volumes.

Whilst the long term nature of these contracts can be unhelpful in demonstrating the trading nature of toll road operators, where revenues are linked to passenger volumes there can be significant revenue risk. However, for availability-based concessions, the revenues are typically stable in practice.

Further, as noted above, the toll road operator typically holds a concession over the toll road (i.e. they do not own the road asset itself but rather hold a right to operate and receive payments from the trading activity of running / operating the toll road itself). Given the ongoing operational nature of such roads, it is difficult to consider such a business model of this type as being anything other than trading.


Infrastructure investors have entered into various transactions involving pipelines over the past few years; for example, in 2021 a consortium led by BlackRock agreed to invest $15.5 billion in Saudi Arabia’s natural-gas pipelines.

In these transactions, the pipeline asset owner will enter into a long term lease for stabilised flows of the pipeline contents, with minimum volume commitments and fixed tariff payments. As a result, pipeline operators typically benefit from fixed contracts that provide revenue certainty without carrying price risk to investors.

Whilst these characteristics are certainly beneficial to an infrastructure investor seeking to benefit from a long term fixed revenue stream with a single customer, these characteristics can make it difficult to justify the trading status of a pipeline operator. Once the contract is entered into, there is little active management and operational focus required to manage and grow the pipeline business.

Some helpful indicators of trading status could be possible if the company has short term contracts, multiple customers, possibility to grow the customer base or increase tariff payments. However, these are not common features of pipeline assets and, on the contrary, would likely make the asset class less attractive for infrastructure investors.

Solar and wind farms

The development of solar and wind farms is critical in the UK’s transition to green energy. The development timeframe of a solar or wind farm can be long and complex but, at a high level, involves finding an appropriate piece of land (or area offshore, or somewhere to have a floating solar PV), building the equipment and then connecting to the grid. Infrastructure investors may invest at anytime in the process, depending on their appetite for development risk.

Ultimately, once up and running, the operation of a solar or wind farm can require limited management input. This is an unhelpful factor when considering trading status.

On the other hand, the generation of electricity from solar or wind sources is more than just a yield. It involves equipment, the output is uncertain and the activity just has the ‘feel’ of being trading in nature. A significant operating and maintenance contract is often entered into by the SPV, again suggesting the activity is not merely passive.

Battery storage

Battery storage helps to address the intermittent nature of renewable energy, allowing energy from clean sources to be stored and made available on demand. Intelligent battery software decides when to store the energy for future and when to release it to the grid.

As with solar or wind farms, investors may deploy their capital at a number of phases, from the development stage right through to fully operational battery storage assets. Similarly, once up and running, little management input may be required from the SPV.

On the other hand, the storage and decision of when to reserve and when to release energy to the grid is more than just a yield. It involves maintaining equipment, the profits are uncertain and the activity may pass the ‘smell’ test when it comes to assessing trading status.

Other considerations

Transactions in land

In certain of the scenarios above, the transactions in land (“TiL”) anti-avoidance provisions will need to be considered carefully.

The TiL rules are wide-ranging and seek to treat gains arising on the disposal of land (directly or indirectly) as trading income, and not as capital (i.e. SSE would not be available).

Qualifying Asset Holding Companies

The proposed qualifying asset holding companies (“QAHC”) legislation may remove the exit taxation uncertainty for certain investors. The rules state that a gain accruing to a QAHC on a disposal of overseas land or ‘relevant’ shares is not a chargeable gain. Shares are ‘relevant’ unless their disposal would be regarded as a disposal of an asset deriving at least 75% of its value from UK land.

Exit via a sale of the top holding company

In practice, for investment funds, it is often possible to exit investments through a sale of the top holding company, with the ultimate investors in the fund being subject to tax based on their own facts and circumstances. That said, certain ultimate investors may themselves be UK corporate taxpayers with an indirect interest in the top holding company of over 10% and may be seeking to avail themselves of the SSE.

Qualifying Institutional Investors

Finance (No 2) Act 2017 introduced a further exemption for disposals of shares by companies owned wholly or partly by a new category of institutional investors, defined as Qualifying Institutional Investors (“QIIs”) whereby the trading condition does not need to be met for SSE to apply.


In a number of the scenarios above, the ‘premium’ paid by a purchaser above the underlying asset value relates to intangible assets e.g. customer contracts or goodwill. Helpfully, such intangibles could be considered ‘good’ assets for SSE purposes as they generally relate to the trading elements of a business. Take an airport as an example, whilst car park activities or renting out retail space could be considered ‘bad’ assets, any goodwill paid by a purchaser would likely attach to the trading elements of the airport and therefore be considered part of a ‘good’ asset base.


There is no statutory clearance procedure under which companies can have their trading status confirmed; however, where there is genuine uncertainty, non-statutory clearance can be sought from HMRC.

Great! But the problem is that investors will want to understand at the time of their initial investment whether there will be any exit taxation, and any clearance given would be based on the facts at the time of the clearance (and it would be unusual to seek a clearance about an exit that may occur in 10+ years’ time).


A detailed analysis of the facts and circumstances is needed on passive infrastructure assets to understand whether they should be considered ‘trading’ for UK tax purposes. A ‘look-and-feel’ test can only get you so far when a potential exit tax could hit an investor’s return.

Investors should be aware of the SSE risks at the outset (i.e. at the time of their initial investment) as the risks may impact a future exit or require a re-think on the acquisition holding structure.

Key Takeaways

  • What is the issue?

It is not always clear whether passive infrastructure assets should be considered as ‘trading’ for UK tax purposes. This can cause unexpected taxable exit gains for infrastructure investors.

  • What does it mean for me?

Investments into passive infrastructure assets must be carefully considered and it may, in certain circumstances, be more appropriate for investors to hold passive infrastructure assets via non-UK holding companies.

  • What can I take away?

A detailed analysis of the facts and circumstances is needed on passive infrastructure assets to understand whether they should be considered ‘trading’ for UK tax purposes.