Draft legislation for Finance Bill 2022 (the "Bill") was published on 20 July 2021. One of the main pieces of draft legislation included in the Bill is the introduction of a new tax regime for asset holding companies (the "Regime"). This Newsflash provides an overview of proposed key features of the Regime.
Asset Holding Companies?
In essence, asset holding companies in this context refer to intermediate investment vehicles for alternative fund structures, i.e. intermediate holding companies or vehicles that 'house' the assets of international investment funds.
While the United Kingdom has historically been a popular home to fund managers, the same unfortunately cannot be said of asset holding companies. Predominantly a mainstay of other jurisdictions such as Luxembourg, Ireland and the Netherlands, the United Kingdom has trailed in competitiveness in this regard – in no small part due to differences in relevant tax rules (for example, restrictions on the scope of the UK's participation exemption for sales of equity interests and limitations on deductions for certain interest payments).
With the Regime, the United Kingdom is seeking to align aspects of its legislative framework with its contemporaries. In particular, the UK government has stated that the Regime should broadly function to tax investors as if they had invested in the underlying assets themselves, such that asset holding companies should 'pay no more tax than is proportionate to the activities they perform'.
The Draft Bill
At the outset, it is important to note that only draft legislation has been published. In other words, the published provisions are subject to change, and there may be some provisions that are a part of the final version that are not in the draft legislation.
Additionally, there may be amendments to other parts of tax legislation to ensure that existing tax rules interact as intended with the Regime.
Qualifying Asset Holding Companies
The Regime is not intended to apply to all asset holding companies or intermediate holding companies. Rather, the Regime is meant to target taxation of qualifying asset holding companies ("QAHCs").
The Regime is also not meant to apply to all payments and activities of a QAHC. In other words, the Regime is broadly intended to only be available to investment arrangements that involve the pooling of investor funds with professional investment managers, and is not intended to affect the taxation of a QAHC's profits from other activities or arrangements, e.g. trading activities, UK property or intangibles.
As the Bill is currently drafted, for a company to qualify as a QAHC, it must:
i. be resident in the United Kingdom;
ii. meet the 'ownership condition';
iii. meet the 'activity condition';
iv. not be a UK REIT;
v. not have equity securities listed or traded on a recognised stock exchange; and
vi. make a decision to be a QAHC.
The ownership condition will be met if the company is at least 70% equity owned by diversely held, eligible funds (with regulated managers) or certain institutional investors.
The activity condition will be met if the main activity of the company is investing its funds with the aim of spreading investment risk and giving investors in the company the benefit of the results of the management of its funds.
The key features of the Regime that the Bill proposes to introduce (apart from anti-avoidance provisions) are as follows:
- exempting gains on disposals of certain shares and overseas property by QAHCs;
- where profits of an overseas property business of a QAHC are subject to tax in an overseas jurisdiction, exemption of those profits from tax;
- allowing deductions for certain interest payments that would usually be disallowed as distributions;
- switching off the late paid interest rules so that in certain situations interest payments are relieved for a QAHC on an accruals (rather than paid) basis;
- disapplying the obligation to deduct tax from certain payments of interest on securities held by investors in a QAHC;
- switching off the distributions rules so as to allow premiums paid, when a QAHC repurchases its share capital from an individual investor, to be treated as capital rather than income where, broadly, these derive from capital gains realised by the QAHC on the underlying investments; and
- exempting from stamp duty and stamp duty reserve tax repurchases by a QAHC of share and loan capital it has previously issued.
Other ancillary features of the Regime include (or are expected to include):
- an "entry charge" for Companies going into the Regime (by way of a deemed disposal and reacquisition of assets relating to qualifying activities); and
- specific provisions to cover off the treatment of tax losses (including the use of pre-entry losses against post entry profits).
The changes above are envisaged to take effect from:
- 1 April 2022 for the purposes of corporation tax, stamp duty and stamp duty reserve tax; and
- 6 April 2022 for income tax and capital gains tax.
Whilst further work is required to refine and build out the Regime, it is clear that it represents an exciting development which attempts to remove certain of the existing barriers to using UK domiciled investment vehicles. Accordingly, the new Regime could be of significant interest to many international investment funds.