The New UK Qualifying Asset Holding Company Regime – A Quick Overview | Vinson & Elkins LLP
The UK Qualifying Asset Holding Company (“QAHC”) tax regime came into effect on 1 April 2022. The regime provides a generous relaxation of certain UK tax rules for UK resident investment vehicles that meet certain qualifying criteria. eligibility, and aims to help the UK to be competitive. with commonly used asset holding jurisdictions such as Ireland and Luxembourg. Using a QAHC could be an efficient way for eligible funds and institutional investors to hold UK and non-UK investments, both from an administrative and tax perspective. QAHCs may be of particular interest to fund managers and other investment industry players already present in the UK who are concerned about the need to create substance in Luxembourg, particularly in light of ATAD III, a proposal for a European directive aimed at preventing the misuse of “fictitious” 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 (“Class A investors”), such as investment funds and various types of institutional investors (e.g. , most pension funds, REITs, wealth funds and many insurance companies), whose principal activity is the exercise of an investment activity and which opts for the new regime.
A QAHC is in principle entitled to the benefits of UK bilateral double tax treaties provided, of course, that the conditions for relief are met.
What are the tax benefits?
The many UK tax advantages include a wide exemption from tax on gains from shares (other than in property-rich UK companies) and non-UK land, a deductions scheme which should keep taxable profits at a level very low (by authorizing, for example, deductions for interest linked to profits normally not deductible) and a complete exemption for foreign business income. In addition, there are tax advantages for investors, with normal tax rules being waived to facilitate the transfer of QAHC returns to investors in the form of capital (eg via share buybacks). A QAHC also benefits from a general exemption from any obligation to withhold UK tax on interest payments, which is attractive compared to the administrative burden of a technical bond listing to benefit from the exemption from Eurobonds cited for non-treaty lenders.
In addition, a potential disadvantage of using a UK company for non-UK domiciled individuals is circumvented by the application of special rules allowing non-UK domiciled investment managers to benefit from the taxation of repatriations to ‘non-UK sources’. ” QAHC income and earnings.
What can a QAHC be used for?
QAHCs can be useful in a number of different situations, including in credit fund structures and as primary holding companies.
The principal activity of the QAHC must be the operation of an investment business. Any other activity (for example, trading activities) must be incidental to this investment activity and not be carried out to a substantial extent. This condition should not be a problem for most private equity funds or credit funds that acquire debt on the secondary market for investment purposes, but it is less clear how this condition will affect funds that engage in loan origination activities. It is hoped that guidance from HMRC will eventually provide some clarification on this point.
QAHC’s investment strategy should not involve the acquisition of listed or exchange-traded equity securities except for the purpose of facilitating a change of control. This general prohibition does not preclude the acquisition of a first participation within the framework of a public-to-private transaction. In addition, this condition should not affect a potential IPO exit strategy which may involve a “lock-up” period, as such exit would not involve the acquisition of public securities by QAHC.
Who will the new QAHC diet appeal to?
The QAHC scheme is an important development and creates opportunities for qualifying funds and institutional investors to locate asset holding vehicles in the UK.
The scheme will be particularly attractive to fund sponsors and other players in the investment industry operating in the UK. The scheme offers the possibility of establishing UK holding companies which will benefit from any existing UK substance, will be able to access the UK’s extensive network of double tax treaties and will act as vehicles to hold UK and non-UK assets in a way fiscally and economically efficient. -efficient manner. The planned implementation of ATAD III, which is expected to introduce increased substance requirements for EU-based companies, may generate particular interest in QAHCs.