UK Asset Holding Firms: What Does the Future Maintain? – VAT

UNITED KINGDOM:

UK Asset Holding Companies: What Does the Future Hold?

March 01, 2021

Cadwalader, Wickersham & Taft LLP

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The UK Government's public consultation on Asset Holding
Corporations (AHCs) are just done after they started running December 15th.
2020 to 23 February 2021. The UK Government's goals in
The consultation was to improve the government
Understanding the AHCs, the fund structures in which they are used,
and the commercial drivers of their location as well
Introduce legislative changes that bring clear benefits
Facilitating the flows of capital, income and profits between
Investors and the underlying investments in the AHCs. The first
The consultation document was published as part of the United Kingdom in March 2020
Ministry of Finance 2020 budget (first consultation). The second
Consultation document (Second Consultation) was published in
December 2020 and launched the public consultation phase, the
has just closed.

In conclusion, the second consultation focused on the trial
Reduce a number of key barriers in designing a functional and functional
attractive regime for British AHCs. We have summarized some of the keys
Aspects of the second consultation below and have considered some
of the challenges for the government in each of the presented
Areas.

Width of consultation: one of the challenges for the UK
The government in the second consultation was far-reaching
Task of the AHC consultation itself. Both the first consultation
and the second consultation covered a variety of structures
and arrangements, including alternative loan funds,
Securitisations, private equity and real estate investments.
Creation of a viable AHC regime that is equally effective in all areas
A variety of asset classes have proven challenging.
International comparisons: The UK government has a clear
Aim in trying to get the status of the UK as a
global asset management and finance center. That goal would
well served by creating a popular, workable, and effective
AHC regime. UK companies could benefit from practical tax breaks
within an AHC regime, like the ease of being able to demonstrate
international tax base given the existing UK
Operations of many financial market participants. Benefits would
Follow the UK Treasury Department if a popular AHC regime can be created.
including direct tax benefits from pro-rata taxes and
the taxation of related employment. However, these are practical
Benefits can only be achieved if some outstanding challenges can be faced
away. One of the most important ones is how well the UK AHC regime would do
Tariff next to international competitors, especially those
in Ireland and Luxembourg. Is it enough for a British AHC regime?
offer comparable advantages compared to other UK domestic
Structures? Or should the AHC regime at least convey that?
same advantages as other international regimes, or even optimally
improve its international competitors?
Withholding tax: The UK has a 20% withholding tax
Interest payments on unlisted loan securities. By
In comparison, Luxembourg does not levy any withholding tax on interest
Payments for Loans. Any interest payment on unlisted UK debt
AHC should therefore have a way of eliminating them
Withholding costs, especially since some are investments in an AHC
likely made from widely used collective investment vehicles
where the eligibility of the contract may be difficult to track. Unless a
A withholding tax exemption for interest payments is in the
Britain's AHC regime, the international comparison with others
Regimes would be unfavorable and obvious.
Capital Gains and the UK Exemption:
Capital gains on assets within a UK AHC or AHC
Group, are a major topic of discussion in the second
Consultation. While the risk of UK corporate tax liability is on
Disposal of assets is less likely to be an issue for an alternative
Loan funds are highly relevant to the possibility of capital gains
for real estate investments by an AHC. Find a single
Solution that encompasses all asset classes and does not include a
disproportionate advantage for AHC investors compared to others
UK corporate investors have been one of the challenges in the
Second consultation.
Real Estate: Investors usually have to pay taxes on rent
Income and capital gains from real estate in the UK, even if these
Investors are based outside of the UK. This tax treatment for
Non-UK investors in UK commercial real estate have increased in the UK
Tax law in 2019. One of the questions in the second
Advice is on whether this should be the basis of UK property taxation
remain in the AHC regime, and how this tax regime could
effectively sit next to real estate outside of the UK
Participations within the AHC regime. A broader question to be addressed in
the UK Government's ongoing and parallel review of the UK
A real estate AHC could work in the fund industry
next to a UK REIT. While REITs and AHCs can support different ones
Investor base to ensure that these two regimes in a
Mutually supportive and non-distorting manner is something the
The government must achieve this.
Value Added Tax: For many years, industry associations and tax advisors have
advocated easing UK VAT rules
Management fees. VAT reimbursement for administration fees
The government in the EU has announced that it will encumber a British AHC will
The second consultation will be taken into account in the broader UK funds
Review. This is a visible distinction between Ireland and Luxembourg.
exempt from VAT that are currently certain management fees.
A change in sales tax rules for administration fees is likely one
from the bluebells as seen by the AHC consultation of
Investors and industry participants. In a post-Brexit context
if international tax competition is not considered optimal,
Such a change in VAT could be politically difficult to achieve.
Investor taxation: The questions as to how investors in a
UK AHC bear taxes and at what level (with the AHC or with the
at investor level) are some of the most complicated elements of the
Second consultation. For example, the government has proposed
a regime-specific exception for investment capital gains
the level of the AHC. However, the second consultation
suggested pinning this exception to a tracing proposal so that
Amounts returned to AHC investors that are attributable
Investment capital gains are treated as capital gains in the hands
of investors. Additional questions arise whether such
A traceability method would be simple, predictable, workable and
– perhaps most importantly – attractive compared to
comparable international regimes. The problem for the British government
is in the process of creating a regime that enhances the attractiveness of a
clear exemption, but still fair to the broadest group of
UK taxpayers using other UK investment structures and levels
Comparison with international competitors.
Legislative Timetable: After all, you might be forgiven
I wonder if the AHC project timeframe is too ambitious.
The public consultation took place from December 15, 2020 to February
23, 2021. Legislation is in place by the UK Government
Finance Bill 2021, a breathtakingly tight date for consultation
this complexity and far-reaching effect.

If all the challenges identified in the second consultations can
be resolved on a tax and political level within the UK
There is a possibility that the UK AHC regime could have a government
effective and cheap UK tax system compared to other domestic ones
Investment structures and possibly compelling when placed
next to international competitors. The fascination of watching
The progress of the second consultation is that of the UK
Position in a post-Brexit and post-COVID could die Europe
Suggestion for ambitious reforms. But what is just as uncertain is
is the extent to which other, more well-known fiscal burdens occur
Austerity measures and fears of an erosion of the tax base could speak against it
radical changes.

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