The UK qualifying asset holding company (“QAHC”) tax regime came into force on 1 April 2022. The regime provides a generous relaxation of certain UK tax rules for UK resident investment vehicles meeting certain eligibility criteria, and is intended to help the UK compete with commonly used asset-holding jurisdictions such as Ireland and Luxembourg. The use of a QAHC could be an efficient way for eligible funds and institutional investors to hold UK and non-UK investments from both an administrative and a tax perspective. QAHCs may be particularly of interest to fund managers and others in the investment business with existing presence in the UK who are concerned about the need to build substance in Luxembourg, especially in light of ATAD III, a proposed EU Directive intended to prevent the misuse of “shell” entities for tax purposes.
What is a QAHC?
Essentially, a QAHC is an unlisted UK tax resident company that is at least 70% owned by “good” investors (“Category A investors”) such as investment funds and various types of institutional investors (e.g., most pension funds, REITs, sovereign wealth funds and many insurance businesses), which has a main activity of carrying on an investment business and which elects into the new regime.
A QAHC is in principle entitled to the benefits of the UK’s bilateral double tax treaties subject, of course, to the conditions of relief being satisfied.
What are the tax benefits?
The wide-ranging UK tax benefits include a broad exemption from tax on gains from shares (other than in UK-property rich companies) and non-UK land, a deductions regime that should keep taxable profits very low (by, for example, allowing deductions for normally non-deductible profit-related interest) and a complete exemption for foreign property business income. In addition, there are tax benefits for investors, with normal tax rules disapplied to make it easier for returns from the QAHC to be passed to investors in capital form (for example, via share buy backs). A QAHC also benefits from a blanket exemption from any requirement to withhold UK tax from payments of interest, which is attractive compared to the administrative burden of a technical listing of bonds to avail of the quoted Eurobond exemption for non-treaty entitled lenders.
In addition, a potential downside of using a UK company for non-UK domiciled individuals is side-stepped by the application of special rules allowing non-UK domiciled investment managers to benefit from the remittance basis of taxation in respect of “non-UK source” income and gains from the QAHC.
What can a QAHC be used for?
QAHCs may be useful in a number of different situations, including in credit fund structures and as master holding companies.
The main activity of the QAHC must be carrying on an investment business. Any other activities (e.g., 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, but it is less clear how this condition will affect funds which engage in loan origination activities. It is hoped HMRC guidance will eventually provide some clarity on this point.
The investment strategy of the QAHC must not involve the acquisition of equity securities that are publicly listed or traded, except for the purpose of facilitating a change of control. This general prohibition does not prevent 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 QAHC.
To whom will the new QAHC regime be of interest?
The QAHC regime is a significant development and creates opportunities for eligible funds and institutional investors to locate asset holding vehicles in the UK.
The regime will be particularly appealing to fund sponsors and others in the investment business with UK presence. The regime offers the opportunity to establish UK holding companies that will benefit from any existing UK substance, be able to access the UK’s extensive double tax treaty network, and serve as vehicles for holding UK and non-UK assets in a tax-efficient and cost-effective manner. The anticipated implementation of ATAD III, which is expected to introduce heightened substance requirements for EU-based companies, may drive particular interest in QAHCs.
