HMRC Consults on Tax Residence of Non-UCITS Funds Managed by UK Managers

by Dechert LLP

HMRC has released a series of consultations regarding financial services taxation. The proposed measures are in line with the Government’s “UK investment management strategy”, a commitment announced in the 2013 Budget to protect the UK’s position as Europe’s leading centre for fund management. The most significant consultation for the alternative asset management industry proposes helpful amendments to give certain offshore non-UCITS funds (or “alternative investment funds” (AIFs)) additional comfort that they will not be treated as UK tax resident.


The consultation regarding the residence of AIFs is designed to provide certainty that locating the management of certain offshore non-UCITS funds in the UK will not lead to a risk of such AIFs being treated as UK tax resident. Non-UK UCITS funds managed from within the UK already benefit from this certainty under section 363A of the Taxation (International and Other Provisions) Act 2010 (“Section 363A”). If implemented, the proposed extension should reduce the administrative burden of ensuring central management and control (CMC) is not carried out in the UK.

Section 363A TIOPA was introduced in the Finance Act 2011 in response to the “management company passport” introduced by the UCITS IV directive. The “passport” allows a fund authorised under that directive to be managed by a manager authorised in any other Member State. To encourage the competitiveness of the UK’s fund management industry, Section 363A provides certainty that non-UK UCITS funds authorised and treated as resident in another Member State but managed from the UK will not be treated as resident in the UK for tax purposes.

Where CMC takes place is one of the principal tests used to determine UK residence for corporation tax purposes. Broadly, CMC is exercised where the highest level of control of the business of a company is to be found. This is generally at board level although only in circumstances where CMC is actually exercised by the board of the fund. Currently, UK fund managers of non-UCITS funds must ensure that CMC takes place outside the UK to prevent the fund being resident in the UK for tax purposes.

The alternative investment management directive imposes new oversight obligations on a manager of an AIF under the Directive (an AIFM). These obligations include important issues such as having an involvement in approving and implementing the investment strategy, appointing the prime broker and setting maximum leverage limits for the AIF. Consequently, representations were made to HMRC with a view to introducing a similar relaxation of the CMC residence rules for such AIFs.


As part of its commitment to “the UK investment management strategy”, the Government is now consulting on proposals to widen the scope of Section 363A to encompass certain offshore non-UCITS funds particularly given the new AIFM oversight obligations that are being introduced as part of the AIFM Directive.

The Government’s proposal is that Section 363A should be extended to include those entities that are:

  • AIFs which are within the definition of an offshore fund for UK tax purposes, and
  • which have a UK-based manager that is either an alternative investment fund manager authorised by the Financial Conduct Authority or a branch of such a manager authorised in another Member State.

The extended provision, if introduced, should give UK managers comfort that AIFs falling within the revised provision will not be treated as being UK tax resident. This should reduce some of the administrative pressure involved in policing measures currently taken in relation to CMC (essentially relating to the key decision making processes). However, it is worth noting that such measures may still need to be maintained for other reasons, such as to ensure that the relevant funds remain resident in their current jurisdiction (for treaty purposes or otherwise).

The Consultation

The consultation process will run until 14 October 2013. If the scope of the legislation is to be extended, the change will be introduced in the Finance Bill 2014.


Links to the consultations papers are set out below.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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