Introduced under the Finance Act 2022, the UK Qualifying Asset Holding Companies (“QAHC”) regime’s key aim is to enhance the UK’s competitiveness as a location for asset management and investment funds by addressing the challenges that may lead such companies to be located outside of the UK. There are already a number of benefits of the UK tax system, i.e., it has an extensive treaty network, and there is no withholding tax on dividends, however, it appears that the UK was still not the main choice for many asset managers even where funds themselves were being managed in the UK. The most popular regime is Luxembourg (for funds with European investors), the others being Ireland and the Channel Islands for certain types of funds. We note that the choice of location for asset managers is not merely driven by tax, but other commercial and regulatory reasons.
Since the QAHC regime came into force on 1 April 2022, we continue to receive a large number of queries from asset managers, particularly in relation to the conditions required to be met to fall within the regime, its benefits compared to other regimes i.e., in the Channel Islands, Ireland and Luxembourg, as well as potential costs related to the implementation and administration of the regime.
In this article (updated from the previous here), we summarise a handful of Frequently Asked Questions that we have been asked as well as our common responses. It is important to note that our responses are provided at a high-level and do not take into specific background facts and circumstances of a fund’s arrangements, which will likely differ in terms of its commercial objectives, asset classes, etc.
Please note that the QAHC legislation and HMRC guidance are evolving so it is important to keep updated with the developments. As part of the proposed Finance Bill 2023 released in July, there will be further amendments, so that the eligibility conditions that must be met for a company to be a QAHC better align with the intended scope of the regime. There have been many questions raised, particularly in relation to the ‘ownership condition,’ which has already been revised from the previous draft of legislation.
1. Why are asset holding companies important in a fund’s structure?
The asset holding companies sitting underneath a fund (typically, structured as a limited partnership for alternative investment funds) are important as they help create legal separation between assets and the owners, facilitate financing i.e., external debt, and reduce risk and liability for owners in certain events. They also enable the fund to provide incentive arrangements to managers and enable co-investment. The location and type of these vehicles have certain other benefits too.
2. What is covered by the QAHC regime?
The QAHC regime only covers the company’s investment activities in relation to certain ring-fenced assets. Ring-fenced assets include qualifying shares, loan relationships, and overseas property (including related derivative contracts).
‘Qualifying shares’ are broadly defined as shares that are not UK property rich shares (i.e. those which do not derive > 75% of their value from UK land).
Even though the QAHC regime does not apply to assets that are not ring-fenced, the company can still hold such assets subject to further conditions being met (activity and investment strategy conditions).
3. What are the key tax and commercial benefits of the QAHC regime?
Key tax benefits of the QAHC regime include:
- Gains on the disposal of qualifying shares and overseas property should be exempt from corporation tax. There is no need to meet the existing holding or trading requirements of the substantial shareholding exemption. (“SSE”), which is useful i.e., where non-trading activities are carried out by a company or if a fund holds less than 10% of ordinary share capital.
- There is no withholding tax requirement on interest paid by a QAHC. This means that amounts can be paid to investors without withholding and without having to obtain double tax treaty relief from HMRC or meet the requirements to be classified as a ‘Quoted Eurobond’ (which can be costly too).
- Income (including debt or dividend incomes) of an overseas property business is exempt from tax. This applies so long the profits are taxable in a foreign country.
- Relaxation of rules related to the deductibility of certain payments i.e., interest payments on profit-participating loans. There are anti-avoidance rules which deem interest payments on securities that have features akin to equity to be non-deductible, however, such rules are relaxed. This benefit is particularly helpful for debt-financing structures.
- Payments made on the redemption, repayment, or purchase of a QAHC’s own shares to UK investors will be treated as capital rather than an income tax distribution generally (note that this does not apply in relation to certain employment-related securities). Cash can be repatriated from a QAHC to UK investors without giving rise to UK stamp taxes.
- No negative impact for investors who are non-domiciled. Income and gains from the QAHC are not necessarily UK-sourced and investors can look at the underlying mix of UK and non-UK income and gains.
Costs associated with the compliance of further substance requirements may be reduced upon moving into the QAHC regime, particularly for funds with primarily UK management teams. ATAD 3 which is being proposed to take effect from 1 April 2024 introduces minimum substance requirements and reporting obligations which if not met could mean that tax treaty benefits are denied.
Whether such benefits impact your current or future fund structures depends on a number of factors i.e., what assets your funds hold, financing arrangements and location.
4. Is it difficult to meet the eligibility conditions for a company to be a QAHC? What is the most confusing condition?
This has been a huge topic of conversation and as noted above, the legislation and guidance are evolving. We consider that the conditions aside from the ownership condition are relatively straightforward to meet. By way of recap, a company must meet the following conditions to be a QAHC:
- Be UK resident – please note that a non-UK resident company can change its residence to the UK.
- Meet the ownership condition – this has been the most confusing condition to meet. Broadly it requires that the total of relevant interests (voting rights, entitlement to profits available for distribution and assets available on winding up) held by persons who are not “acceptable” investors should not exceed 30%. There are complex rules related to the calculation of the relevant interests.Acceptable investors include other QAHCs, ‘qualifying funds’, certain institutional investors, i.e., pension funds, life insurance companies and sovereign investors etc. We mostly see attempts to rely on the definition of ‘qualifying funds,’ which are broadly any of:- A collective investment scheme that meets the Genuine Diversity of Ownership condition (which mainly focuses on the way in which the fund is marketed);
– A collective investment scheme or an alternative investment fund which is not “close” (under the Corporation Tax Act 2020).
– A collective investment scheme or an alternative investment fund that is controlled by at least 70% of acceptable investors.We are commonly asked to review whether the above complex conditions are met. Note that carried interest participants and in general, management should not qualify as acceptable investors therefore it is important to track ownership percentages if they are participating directly in the QAHC. If they are participating via the qualifying fund, then further analysis should not be required.
- Meet the activity condition – this ensures that the main activity must be the carrying on of an investment business; any other activities are ancillary. The HMRC guidance notes whether any particular activity will be an investment or trade is dependent on facts and circumstances. In June, the guidance was updated to give comfort to credit funds (and others) on the scope of the trading prohibition for QAHCs (read more here).
- Meet the investment strategy condition – this ensures that the investment strategy of the company should not involve the acquisition of listed/traded securities, or interests deriving value from such securities.
- The company must not be a UK Real Estate Investment Trust.
- Equity securities of the company cannot be listed/traded on a recognised stock exchange or similar market.
- The company must make an entry notification to be a QAHC.
5. Would the QAHC regime impact the taxation of investment managers?
In general, no. Please refer to our previous article here for an overview of the taxation of carried interest and recent topics of HMRC enquiries.
6. On entering the QAHC regime, what are other key tax issues to be aware of?
When entering the regime, a new accounting period is triggered for the company. Assets subject to ring-fencing are deemed to be sold and reacquired at market value, which may trigger chargeable gains. A review of whether the substantial shareholding exemption would apply to exempt gains should be done – note that the exemption has been relaxed for this purpose.
There may also be overseas tax implications to consider on entering the QAHC regime.
7. How could the QAHC regime be introduced in an existing fund’s structure where there are asset holding companies already?
There are a number of options that can be explored, which we can help consider in terms of tax impact, pros and cons. For example, consideration can be given on electing an existing company to be a QAHC, setting up a master QAHC on top of the existing companies or setting up a QAHC for each investment.
8. What are the ongoing obligations under the QAHC regime?
It is stated in HMRC guidance that the QAHC must take reasonable steps to monitor the ownership condition. Depending on the conditions breached, there are certain notification steps that are required to be undertaken.
There are also reporting requirements. A QAHC must provide certain financial information in relation to the assets, proceeds and activities including:
- Details of who provided investment management services;
- Estimates of the market value of the QAHC’s ring fence assets at the end of each accounting period;
- Total gross proceeds arising from disposals of assets from the QAHC ring fence business during the accounting period; and
- Details of payments made by the QAHC on the redemption, repayment or purchase of its own shares.
Note that HMRC has clarified in their recent guidance that a formal valuation is not required to determine an estimate of the market value of the QAHC’s ring fence assets and a reasonable estimate based on the total balance sheet value is acceptable.
9. How A&M can help?
A&M is here to work with you closely and can provide assistance in dealing with enquiries related to the new regime including, but not limited to the following:
- Reviewing the tax implications of your current or future fund structure and assessing whether there would be any impact if the relevant company/ companies are relocated to the UK under the new regime.
- Assisting with meeting the eligibility requirements to be a QAHC.
- Developing tax and reporting compliant approaches in relation to your current or future fund structures under the new regime or outside of it.
If you would like us to see how the QAHC regime specifically applies to your existing fund arrangements or future fund arrangements, please feel free to get in touch with your usual A&M point of contact, Daniel Parry, Orion Ganase, Jordan Brown or Shirley Ly.