The UK government has published final draft legislation for the new qualifying asset holding company (QAHC) tax regime, which is due to come into effect from 1 April 2022. Discussions are also ongoing with HM Revenue and Customs (HMRC) about detailed and operational aspects of the regime, and formal guidance is expected before April.
Initial draft legislation on key aspects of the regime was published in July 2021 (our previous client alert on the initial draft is available here). There have been several important, mostly welcome, changes to the key eligibility criteria and the tax advantages available to QAHCs since this first iteration, including:
- the exemption from withholding tax on interest has been
extended to all payments by a QAHC, not just those to its
investors;
- added ability to obtain interest deductions on convertible
debt;
- broader diversity of ownership criteria for qualifying
funds;
- relaxation of the activity condition to permit single-asset
holding companies;
- new provisions allowing non-domiciled investment managers to
benefit from the remittance basis on non-UK source income and
gains; and
- inclusion of entry/exit and administrative provisions.
Background/Recap
The new QAHC regime is one of the first proposals to be taken forward as part of the UK government's review of the UK funds regime, announced in the Chancellor's 2020 Budget. It is specifically intended to enhance the UK's competitiveness as a location for asset management and investment funds, in order to better compete with other established asset-holding jurisdictions (such as Luxembourg and Ireland) commonly used by asset managers. It is hoped that the new QAHC regime will, as a result, help bolster the UK funds industry more generally by enabling greater colocation of fund activities in the UK (where managers may already be based and/or can take advantage of the wealth of existing supporting infrastructure). For asset holding vehicles which meet the eligibility criteria and elect into the regime, a range of generous tax advantages are available which aim to minimise any tax leakage suffered as a result of the imposition of a corporate investment platform.
The introduction of the QAHC regime follows two rounds of consultation on its design. Draft legislation for inclusion in Finance Bill 2022 was published in July 2021, which has since been amended following consultation and subsequently at the Committee and Report stages of the Bill's passage through the House of Commons. The final draft of the legislation was published earlier this month and is expected to be enacted within the next few weeks once the Bill completes its passage through Parliament. Guidance from HMRC is also expected before the regime comes into effect in April.
Eligibility
An asset holding company (AHC) will only be able to take advantage of the new regime if it meets the following eligibility criteria:
- UK tax residency. The AHC must be resident for tax
purposes in the UK. It is not necessary, however, that the company
be UK incorporated. It will therefore be possible, for example, to
use a Jersey incorporated/UK resident company within the QAHC
regime; indeed, this option may be beneficial in some cases in
overcoming remaining stamp duty and corporate law issues (discussed
further below).
- Ownership condition. Relevant interests held by
non-"Category A investors" in the AHC must not exceed
30%. This condition is described in more detail below.
- Activity condition. The main activity of the AHC must
be carrying on an investment business. Any other activities (i.e.
trading activities) must be ancillary to that investment business
and not carried on to a substantial extent. This condition should
not be an issue for most private equity funds or credit funds which
acquire debt on the secondary market for investment purposes. It is
less clear how this condition will affect funds which engage in
loan origination activities. We consider that, where such
origination is carried on with the intention of creating loans
which will be held for investment purposes, there is a good
argument that this condition should be met, but it is hoped HMRC
guidance will provide some clarity on this point.
- Investment strategy condition. The investment strategy
of the AHC must not involve the acquisition of equity securities
that are publicly listed or traded, except for the purpose of
facilitating a change of control. Despite the general prohibition,
this does allow the acquisition of an initial shareholding in the
context of a public-to-private transaction. Further, this condition
should not affect a potential IPO exit strategy which may involve a
"lock-up" period, as that exit would not involve the
acquisition of public securities by the AHC.
- Public securities. No equity securities of the AHC may
be listed or traded on a public market or exchange.
- REIT. The AHC must not be a UK Real Estate Investment
Trust.
- Election. The application of the QAHC regime is not automatic; the AHC must elect into it. Both newly established and existing AHCs may elect into the QAHC regime. There are transitional provisions for existing AHCs entering the regime, including a deemed disposal and reacquisition of its assets prior to entry (although the resulting tax charge may be mitigated by an extended substantial shareholdings exemption).
Ownership condition
The ownership condition is likely to be the most difficult condition for asset and investment managers to have to consider. The basic condition requires that relevant interests in an AHC held by non-"Category A investors" must not exceed 30%. The inverse, that "Category A investors" must hold 70% of relevant interests, while perhaps a useful shorthand is not strictly correct because, as will be seen, the calculation required by the legislation can result in all relevant interests adding up to more than 100%.
A person has a relevant interest in an AHC if, as a result of holding ordinary shares or loans (other than normal commercial loans), they hold:
- a beneficial entitlement to a proportion of the company's
profits available for distribution to equity holders;
- a beneficial entitlement to a proportion of the company's
assets available for distribution to its equity holders on a
winding up; or
- a proportion of the voting power in the company.
Each investor's "relevant interest" for the purposes of applying the ownership condition is the highest of the three with regard to their individual holding. Therefore, where voting power does not follow strictly the economics for a company, such that different limbs of the test above are applied for different investors, the total of all relevant interests can sum to over 100%; care should therefore be taken in applying the 30% threshold.
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