New asset-holding fund regime live from 1 April 2022
The QAHC regime provides a tax efficient, UK resident vehicle through which certain types of institutional investors and funds can hold investments. This is similar to the fund investment holding structures in Luxembourg and Ireland, whereby asset holding companies facilitate the flow of investments between investors and underlying assets.
What is a QAHC?
A QAHC is a company which meets certain statutory conditions. The conditions are broadly as follows:
(i) the QAHC must be UK resident;
A company will be UK resident if it is incorporated in the UK or if it is incorporated outside the UK but its central management and control is carried out in the UK. These rules are subject to any contrary terms as may be contained in any double tax treaty agreed between the UK and another territory.
(ii) the QAHC must meet the ownership condition;
‘Non-Category A Investors’ must hold no more than 30% of the relevant interests in the QAHC (i.e. voting power and beneficial entitlement to assets or profits). ‘Category A Investors’ would include:
- collective investment schemes or alternative investment funds that meet the genuine diversity of ownership condition,
- relevant qualifying investors (e.g. a UK REIT or non-UK equivalent of a REIT, certain collective investment vehicles, trustee or manager of a pension scheme and certain charities);
- other QAHCs, and
- certain public authorities.
A modified version of the ownership condition applies in the first two years of a company becoming a QAHC.
(iii) the QAHC must meet the activity condition;
The QAHC’s main activity must be the carrying on of an investment business (and must not, on general tax principles, carry on a trading business). Any other activities must be ancillary to its investment business and must not be carried on to any substantial extent.
(iv) the QAHC must meet the investment strategy condition;
The QAHC's investment strategy must not involve the acquisition of listed or traded securities or interests deriving their value from such investments (other than for the purposes of acquiring a de-listing a public company).
(v) the QAHC must not be a UK REIT;
(vi) the QAHC must not be a publicly traded company;
(vii) the QAHC must have completed, and submitted to HMRC, an entry notification.
What are the benefits of being a QAHC?
The QAHC regime was set up to facilitate certain institutional investors and funds holding investments across a range of private market strategies. However, the tax benefits of the QAHC regime are what should make this regime appealing to such investors. The key tax benefits are as follows:
(i) no liability to UK corporation tax arises on capital gains realised from the disposal by the QAHC of non-UK land or shares (other than shares in UK property rich companies);
(ii) no liability to UK corporation tax arises in respect of profits attributable to a QAHC’s overseas property business to the extent that such profits are taxable in an overseas jurisdiction;
(iii) no liability to UK corporation tax arises in respect of profits attributable to loan relationships and derivative contracts if they are entered into for the purposes of the QAHC’s overseas property business to the extent the profits of that business are exempt from UK corporation tax (see (ii));
(iv) no Stamp Duty or Stamp Duty Reserve Tax arises on a repurchase by a QAHC of its own shares or loan capital, subject to certain conditions being met;
(v) except in the case of qualifying employment related securities, any redemption, repayment or purchase by the QAHC of its own shares will receive capital tax treatment. This facilitates repatriation of monies to investors in capital (rather than income) form, which can be beneficial for tax purposes;
(vi) distributions or payments of interest from the QAHC in respect of relevant securities relating to the QAHC’s ‘ring-fenced business’ will, provided certain conditions are met, fall outside the usual rules relating to distributions, giving rise to a deductible debit for the QAHC for corporation tax purposes;
(vii) the late paid interest rules are modified where a QAHC is a debtor under loans relating to its ring fence business so that any interest payable by the QAHC can be deducted when it accrues (as opposed to when it is paid);
(viii) there is no requirement for a QAHC to apply withholding tax to any interest payments it makes. This will make QAHC’s attractive as there will not be the usual requirement to navigate the quoted Eurobond exemption or utilise the Double Treaty Passport Scheme in order to mitigate against the UK’s application of withholding tax to interest.
This is an important development for the purposes of eligible funds and investors to make use of asset holding vehicles in the UK via the new regime. The regime will clearly be of interest for new investment holding structures, but the flexibility of the rules also presents opportunities for existing UK and non-UK companies to consider joining the regime in order to take advantage of the tax benefits being offered.
Alongside further reforms to UK’s fund regime such as the Professional Investor Fund, this is an exciting time for eligible investors and the fund management industry in the UK.
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