Taxation of Asset Holding Companies
Miles Dean discusses the introduction of the QAHC regime, the latest development in the UK’s post-Brexit competition drive.
We wrote about the Government’s consultation on fund asset holding companies in our January edition and the proposals look set to be introduced as of 6 April 2022. The new elective tax regime will apply to companies that hold assets as part of fund/collective investment scheme structures. So-called qualifying asset holding companies (QAHCs) must be at least 70% owned by diversely owned funds managed by regulated managers, or certain institutional investors. The aim of the new regime is to facilitate the flow of capital, income and gains between investors and underlying investments as if the investors held the assets directly.
The regime is intended to only be available to investment arrangements that involve the pooling of investor funds with professional investment managers and is not intended to affect the taxation of profits from trading activities, UK property or intangibles.
The main features of QAHC regime include:
- exemption for gains on disposals of certain shares and overseas property by QAHCs;
- exemption for profits of an overseas property business of a QAHC (where such profits are subject to foreign tax);
- deductions for certain interest payments that would usually be disallowed as distributions (e.g. in respect of a profit participating loan); and
- exemption from withholding tax on payments of interest to investors in the QAHC.
QAHCs will be liable to UK corporation tax (CT) on profits not covered by the new regime. For instance, UK source property income and gains will be subject to CT. Foreign property gains will be exempt irrespective of whether they are liable to tax at source, whereas foreign property income is exempt only if it is subject to foreign tax.
The new regime is clearly designed to challenge the likes of Luxembourg and Dublin as current European leaders in the fund space. The issue for the Treasury is to ensure the regime is used by genuine widely held structures whilst avoiding the need for overtly complex and burdensome provisions to prevent abuse. One only has to look at the UK’s Patent Box regime to see how difficult a balancing act this is.
However, challenges apart, this is a significant step in the right direction adding a further string to the UK’s bow.