The UK government on 23 March 2023 published proposed amendments to the recently enacted UK qualifying asset holding company (“QAHC”) regime. Seeking to help the QAHC regime better operate as intended, the amendments address issues with the existing set of rules, and when enacted should improve access to the regime for a wider range of fund structures. 

By way of reminder, the QAHC is a new tax advantaged regime for UK resident companies that was introduced with effect from 1 April 2022. The QAHC is designed to be an intermediary holding company in the private equity, private credit and real estate investment sectors, and is intended to be a viable competitor to an Irish or Luxembourg intermediate holding company in a fund structure. In summary, provided the eligibility conditions are satisfied, a QAHC is able to benefit from a range of tax treatments ordinarily unavailable to a UK resident company. The QAHC regime, broadly speaking, aims to tax the QAHC’s ultimate investors as if they had invested directly in the underlying assets, and for the QAHC to pay no more tax than is commensurate to its role as an intermediate holding company on a small transfer priced margin. For example, the QAHC regime includes exemptions from capital gains tax on certain asset disposals and from UK withholding tax on interest payments from the QAHC to its investors.

In summary, the proposed changes:

• Enable some investment by QAHCs in listed securities, previously disallowed;
• Enable use of QAHCs in multi-vehicle funds using upstream structures such as feeder, parallel and aggregator vehicles, by modifying the genuine diversity of ownership (“GDO”) condition;
• Enable wider use of QAHCs by corporate funds, by expanding the definition of collective investment scheme so that corporate funds can use the GDO condition;
• Allow alternative finance arrangements (such as Islamic finance) to be treated as equity interests when determining whether the ownership condition has been met;
• Tighten anti-fragmentation rules to prevent circumvention of the ownership condition; and
• Clarify that a UK QAHC cannot be a UK securitisation company.

Here are some additional details on a few of the more significant changes.

Investing in listed securities

One of the eligibility conditions for use of the QAHC regime is that the QAHC’s strategy does not include investing in listed securities or interests deriving their value from listed security positions (known as the investment strategy condition). The proposed amendments will enable entities to elect out of this condition and acquire listed securities as a QAHC. However, if a QAHC makes this election, the QAHC will not be able to take advantage of the exemption from tax on dividend income in respect of any listed securities held.

Ownership condition: expansion of GDO to corporate funds

One of the eligibility criteria for entry into the QAHC regime is that no more than 30 percent of a QAHC must be held by “bad investors” called non-Category A investors. In other words, the QAHC must be owned 70 percent or more by “good investors” (being Category A investors). The most common type of Category A investor in a fund context is a “Qualifying Fund”. Broadly, an entity is a “Qualifying Fund” if it is a collective investment scheme (“CIS”) and it: (i) meets the “genuine diversity of ownership” (“GDO”) condition; or (ii) is not closely held; or (iii) if closely held, is 70 percent or more owned by Category A investors. Meeting the GDO condition is attractive because it is a one-off condition on entry, unlike the other criteria which require ongoing monitoring. This could be particularly attractive to open-ended corporate funds.

Currently, an alternative investment fund (“AIF”) which is not a CIS by reason of being a body corporate (which currently might include certain offshore limited partnerships as well as certain corporate funds) cannot access the GDO condition and therefore cannot be a Qualifying Fund on that basis. The proposed amendments will make it possible for a corporate AIF to meet the GDO condition. This change will be treated as having effect from the introduction of the QAHC regime.

Ownership condition: expansion of GDO conditions to multi-vehicle funds

Currently, funds seeking to classify as a “Qualifying Fund” Category A investor using the GDO must satisfy the GDO independently for each relevant entity in the fund structure. This has been particularly problematic for feeder, parallel and aggregator funds in structures that would otherwise meet the conditions on consolidated, whole-fund basis, because while the main fund may be widely marketed, it may not be true of these other funds when looked at in isolation. 

Recognising that the existing rules are overly restrictive and do not allow the regime to operate as intended, the proposed amendments allow the GDO conditions to be applied to a “multi-vehicle arrangement”. A multi-vehicle arrangement can be treated in this manner if an investor would reasonably regard their investment as an investment in the arrangement as a whole rather than exclusively in any particular fund vehicle.

It is important not to assume that all feeder, parallel and aggregator funds will automatically qualify as having satisfied this new investor test, and care should be taken to consider the particular facts and circumstances of a given fund and its investors and to draft related documentation accordingly. Equally, AIV arrangements will need special consideration.

Comment   

The new QAHC regime has made a promising start given that it was only launched a year ago, and these changes should enhance its attractiveness for relevant fund structures. In a credit fund context, the QAHC is particularly worthy of consideration in the context of funds that seek to make or acquire significant loans involving UK borrowers (and can also of course be used more broadly for loans with EU and other borrowers). We have also seen a fair amount of interest in establishing QAHCs in Jersey or Guernsey (albeit UK tax resident) given the potential corporate law flexibility and stamp duty advantages of such companies. As EU intermediary vehicles that have historically been popular continue to grapple with ATAD 3 and other complexities, the QAHC now represents an excellent alternative for an increasing number of offshore funds.