A new tax regime for qualifying asset holding companies (“QAHCs”) will be introduced in the UK on 1 April 2022. Draft legislation was released on 4 November 2021 which A&M has reviewed and which has generated a great deal of interest amongst clients in certain fund sectors. Please note that A&M has also reviewed HM Treasury’s responses to the ‘Review of the UK funds regime: a call for input’ published in February 2022 and we will provide a further detailed update on this separately.
A key aim of the regime is to enhance the UK’s competitiveness as a location for asset management and investment funds by addressing the challenges that may lead companies to be located outside of the UK, commonly in Luxembourg because of its beneficial tax regime (Luxembourg has an extensive double tax treaty network and reliefs to ensure investment returns do not suffer material tax). Many clients are therefore considering the potential costs and benefits of relocating companies to the UK under the regime.
Clearly, the choice of location for many UK managed/advised funds is not merely driven by tax, and many are based in Luxembourg or other EU jurisdictions for marketing regulatory reasons. In these cases, funds need to consider whether splitting their location hubs between, say, Luxembourg and a UK QAHC would affect their substance position.
Based on the current draft legislation, we provide an overview of the regime looking into the key tax considerations for asset managers, eligibility to qualify as a QAHC and how A&M can help.
1. Key tax considerations
Key tax features of the new QAHC regime in the UK will include:
- Gains on disposal of non-UK property rich shares (those which do not derive > 75% of their value from UK land) 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”).
- There is no withholding tax requirement on interest paid by a QAHC.
- Profits of an overseas property business of a QAHC (which are taxed overseas) and associated profits from loan relationships and derivative contracts are exempt from corporation tax.
- Various rules including certain anti-avoidance provisions relating to the deduction for finance returns on shareholder debt are switched off.
- 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. Cash can be repatriated from a QAHC to UK investors without giving rise to UK stamp taxes.
- The exemption for Small and Medium-Sized Companies (“SMEs”) are switched off so transfer pricing rules would apply.
- Repurchases by a QAHC of share and loan capital are exempt from stamp taxes.
- Profits arising to qualifying remittance basis users as a result of a payment of interest, distribution by a QAHC or disposal of shares in a QAHC are treated as non-UK source, reflecting the underlying mix of UK and overseas income and gains however note that there is complexity in the apportionment method where further due diligence and valuation may be required.
- Reduces the need to comply with overseas substance requirements which may be costly and administratively burdensome i.e. EU ATAD III and other country-by-country reporting rules.
- The regime is outside the scope of the UK offshore fund rules, which makes it easier to ensure underlying capital gains are returned to investors in capital form for UK tax purposes.
Although at first glance, there appear to be many tax benefits associated with the new regime in the UK, it is important for asset managers to consider the impact of these in line with current and future fund structures. In certain cases, there may be no change to the tax treatment however it may be easier to achieve the beneficial treatment under the new regime because there are less requirements to fall within it. Furthermore, funds’ different types of asset classes determine whether a benefit would be applicable i.e. a benefit may be applicable to a private equity fund but not for a real estate fund, although real estate may also now be attracted with the potential renegotiations of the Luxembourg treaty network.
There are also other tax considerations i.e. VAT aspects (where there is a separate consultation) and the application of the employment-related securities rules, as well as administration, accounting and legal considerations including the numerous entry and exit provisions i.e. the creation of a new accounting period on entering or leaving the regime.
It is important to understand the conditions that are required to be met in order for a company to be a QAHC. We have provided a summary of these below.
- The company must be resident in the UK – please note that a non-UK resident company can change its residence to the UK.
- The company must be held by > 70% “acceptable” investors which broadly include:
- A qualifying fund is defined as a Collective Investment Scheme (“CIS”) which meets the genuine diversity of ownership condition or a “non-closed” CIS or Alternative Investment Fund. Please note that there are specific requirements to meet this i.e. to meet the genuine diversity of ownership condition, broadly, the interests in the fund must be widely available, marketed as such and not limited to specific persons or groups or groups of connected persons. Note that this is being subject to further review and whether a clearance procedure is available for this purpose is yet to be confirmed;
- An intermediate company including another QAHC; and Certain institutional investors i.e. UK public authority, UK / overseas pension scheme, UK / overseas authorised life insurance company, entities with sovereign immunity, etc.
- Certain institutional investors i.e. UK public authority, UK / overseas pension scheme, UK / overseas authorised life insurance company, entities with sovereign immunity, etc.
Although corporate co-investors and carried interest holders do not appear to meet the above definition, if they participate via the fund and the fund meets the definition of a qualifying fund, then our view is that the company should still be eligible.
- The company must meet the “activity condition” which ensures that it will not be used to acquire listed securities and convert income into capital gains.
- 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 election to be a QAHC.
3. How A&M can help
As mentioned above, many clients are considering the potential costs and benefits of relocating their companies to the UK under the new QAHC regime. 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.