After much anticipation, the release of the Finance Bill 2022 included details of the new Qualifying Asset Holding Company (QAHC, pronounced ‘quack’) regime in full feather. The purpose of the regime is to encourage private equity and other asset managers to keep their nests firmly onshore, by locating their holding structures in the UK. The government’s aim is to make the UK competitive in the wake of fierce competition for asset managers’ business, and the disruption of Brexit.
The new rules constitute a positive development for the UK asset management industry – and encouragingly, the promises made by HM Treasury during the consultation have generally been borne out in the release of the draft rules. It is also encouraging to see recognition of the importance of the private equity industry, and a concerted effort to make running these entrepreneurial and dynamic asset management businesses from the UK an easier task.
As always, the question will be who will be willing to test the water – private equity firms are notorious for wanting to be in the middle of the flock. The success of the regime will depend on firms being willing to make the leap, where the circumstances are right.
Some of the key points from the new regime are outlined below – if you would like any more detail, please get in touch with Jennifer Wall, who leads our private equity funds team, Ed Peters, who specialises in private equity real estate, or James Pratt, who leads our private equity deals practice.
Impact of the new regime
The regime gives favourable tax treatment to QAHCs, compared to the way a UK company is normally taxed, in a number of ways. Some key examples include:
- Withholding tax
The requirement to withhold UK tax on interest is removed for QAHCs – originally this was only expected to apply to shareholder debt but has been extended to any debt incurred by the QAHC. While there are other exemptions that have been used historically to deal with withholding taxes, this is a welcome practical simplification.
- Capital treatment of share buy backs
QAHCs can buy back their own shares, giving capital treatment (taxed at 20% or 28%) to the investment managers holding interests in the structure, rather than paying dividends taxed at 38.1%. It should be noted that this treatment does not apply to portfolio level managers, who would still need to carry out a third-party share sale to obtain capital treatment.
- Profit linked loans
QAHCs can obtain tax deductions for interest on profit linked loans – these would otherwise be treated as non-tax deductible distributions
- UK situs
Despite being UK tax resident, to some extent profits repatriated by QAHCs may be eligible to be treated as non-UK situs for non-domiciled investment managers where some or all of the underlying investments are outside the UK. The calculation depends on the source of the historic profits of the QAHC, and will be an additional computation over and above what is currently required for non-domiciled executives to complete their tax returns.
- Corporate interest restriction (CIR)
The latest version of the legislation contains CIR provisions which appear to be targeted at enabling QAHCs to ring fence difference assets for the purposes of the CIR grouping rules. If these are implemented as they appear to be intended, alongside relaxations of the ‘late interest’ rules (and the withholding tax changes referred to above) they should represent a significant simplification of the interest deductibility rules for QAHCs. This would be particularly beneficial for the private equity real estate industry, which by its nature tends to be relatively highly leveraged.
- Exemptions from tax for non-UK real estate
Alongside these changes, another potential boon for the UK private equity real estate industry is the exemption from UK tax for non-UK real estate disposals by a QAHC, and the exemption from tax on non-UK rental income. Historically, the lack of these exemptions has been a significant adverse factor which has hindered the establishment of real estate funds targeting non-UK investment in the UK.
The most complex part of the new regime is undoubtedly the ownership conditions required to qualify as a QAHC – the QAHC needs to be owned by at least 70% ‘good’ investors, which are broadly funds or institutional investors. However, while there are some very detailed provisions to determine ownership, for most structures the exercise should be fairly straightforward. There are potential challenges here where management have substantial ownership interests in the portfolio, or where there are non-qualifying co-investors participating alongside a fund.
At first sight, the expectation is that the rules would operate best for those seeking to establish a UK master holding company – in much the same way a Luxembourg vehicle has been used in structures in recent years. Luxembourg structures are facing increasing levels of scrutiny – investee jurisdictions are placing ever more pressure on levels of substance in Luxemburg, and the technical treatment of alphabet shares is making many advisers more nervous since tax clearances have been unavailable. Therefore, the QAHC could look like a tempting alternative, particularly when the UK government starts to renegotiate its double tax treaty network with Europe following Brexit.
The qualifying conditions may be more challenging to meet for SPV holding structures, especially where management teams hold a large interest, but it should be possible for the conditions to be met by funds and other similar structures provided due consideration is given to the rules in advance.
A quacking opportunity?
After threatening to be an ugly duckling, marred by complexity and onerous anti-avoidance provisions, there is great potential for the regime to be a success. As structures begin to be implemented when the rules take effect in April 2022, no doubt there will be some practical challenges but, for the sake of the continuing success of the industry in the UK, we can all hope that the regime takes flight.
Please contact Jennifer Wall, Ed Peters, or James Pratt to discuss whether a QAHC would right for your next fund or acquisition.