The UK government has published a bill for the Finance Bill 2022-2023


On July 20, 2022, the UK government published a bill for the Finance Bill 2022-2023.

Of particular interest are the changes to the Qualifying Asset Holding Companies (QAHC) regime which were introduced from 1 April this year.

The scheme is part of the UK government’s attempt to increase the attractiveness of the UK as an asset management jurisdiction and introduces a simplified tax regime applicable to QAHCs which should, overall, tax investors as if they had invested directly in the underlying assets. Please see our submission to the PIF 2021 Annual Review and Outlook here for the circumstances under which the scheme is available and its benefits.

The QAHC regime was introduced fairly quickly and contained certain limitations as to how a holding company owned by a private fund could qualify as a QAHC. In particular, one of the key requirements to qualify as a QAHC is that the asset holding company be at least 70% owned by what are described as Class A investors. In the context of private funds , the most useful Class A investor is a “qualifying fund”. It is a collective investment scheme (as defined for UK purposes) which meets a “genuine diversity of ownership” test. “True diversity of ownership” is basically based on the fact that the fund is widely marketed.

This requirement raised the question of whether asset holding companies that were owned either by a number of parallel fund vehicles (as will often be the case to meet the needs of different categories of investors) or by a master fund itself held by feeder funds in which investors invest.

Recent amendments to the regime have been introduced to ensure that the requirements for being a QAHC better align with the original intended scope of the regime by extending the “effective diversity of ownership” tests to parallel funds and master funds where , considered together with other parallel funds or feeder funds, the test would be satisfied.

As HMRC notes, in a parallel fund structure, interests in one fund may be widely marketed and made available, but some investors will then invest through a different fund depending on their particular characteristics. This parallel fund may not itself be widely marketed. The same applies to master/feeder structures, the global fund being marketed but the master fund itself, which will be the investor in the asset holding company, not being directly marketed. This meant that it was unclear under existing rules whether the ownership diversity requirement would be met by these pooled fund structures.

To address this unintended problem, the amendment to the QAHC rules on parallel fund structures provides that a fund will be considered to meet the ownership diversity requirement when it is closely associated with another investment fund that the condition because it is widely marketed and made available. The vehicles must also fulfill conditions requiring investments in substantially the same assets, the holding of investments with the same companies under substantially the same conditions and in the same ratios, and the management of the funds must be substantially coordinated so that they act together with respect to their investments as if it were a single fund. HMRC notes that this means that the funds will not be able to be treated as parallel if they each hold shares of the same potential QAHC of different classes and those shares carry substantially different rights (i.e. not essentially the even active). In addition, the updated legislation will not apply to a shadow fund if the primary purpose, or one of the primary purposes, of the provisions that make it a shadow fund is to satisfy the ownership diversity requirement.

To manage the master/feeder fund structure, the master fund (referred to as an “aggregator fund” in the rules) may be deemed to meet the ownership diversity condition provided that the feeder funds meet this condition (or are treated as doing so). due to the modification of the rules referred to above).

The changes for parallel funds and master/feeder funds will apply from a date to be confirmed.

Additionally, the changes address another issue unrelated to the existing rules. To be a ‘qualifying fund’ (and therefore a Category A investor in a QAHC), the fund vehicle must be a collective investment scheme (CIS) for the purposes of UK law. Certain types of non-UK vehicles which would be a collective investment scheme in general terms may not be so if incorporated as a body corporate under their law of establishment. The QAHC rules are amended to indicate that fund entities that would be a CIV if they were not a legal entity are treated as if they were a CIV and therefore may be qualifying funds provided they meet the other conditions for them to be so eligible. This change is retroactive and applies as of April 1, 2022.

Finally, regarding the calculation of ownership of a QAHC, there is an anti-fragmentation rule that aggregates the various interests of a direct investor in a company with their indirect interests. This rule is now extended to apply where interests are held indirectly through one or more QAHCs. This change limits QAHC qualification by excluding from the regime investment structures involving more than one QAHC in which the combined percentage held by non-Category A investors is greater than 30% and came into effect on July 20, 2022.

These changes are welcome and timely changes to the regime and remove significant barriers to wide adoption of UK-based QAHCs in fund structures and add to the equally welcome clarification of the application of the QAHC regime to investment companies. UK loans from credit funds which we discussed in our previous Tax Talks blog.

© 2022 Proskauer Rose LLP. National Law Review, Volume XII, Number 207


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