Travers Smith's Alternative Insights: The UK as a holding company jurisdiction

A regular briefing for the alternative asset management industry.

As the UK embarks on life outside the EU, the Government is actively talking to the business community about how it can use tax, legal and regulatory reform to stimulate economic activity and enhance Britain's position as a place to do business. As we discussed in our Brexit briefing paper last year, these discussions cut across many sectors, but some are of particular significance to alternative asset managers – perhaps none more so than an initiative to create a new tax privileged regime for asset holding companies. The idea is that the UK's regime would rival that of jurisdictions like Luxembourg and Ireland, enabling domestic and international funds to use UK-based companies to hold portfolio companies and other assets. It is an ambitious objective, and the initiative will only succeed if the Government commits to certainty and simplicity. There is clearly a danger – arising from an understandable need to mitigate abuse – of over-complicating the qualification criteria.

It is encouraging that the Government is actively seeking industry involvement as it develops its proposals, and appears to be determined that the new regime will be widely used. It is also helpful that the UK has a good starting point: an internationally respected legal system and corporate laws, and a range of tax reliefs for companies receiving dividends and capital gains. On the face of it, therefore, UK companies are already attractive as intermediate holding vehicles.

In reality, private funds – especially international funds – often choose an alternative holding company location, in part because the UK rules that determine whether a company qualifies for a particular relief can be complex, somewhat unpredictable at the outset, and often require costly structuring to optimise the position. Another issue for the UK in recent years has been the tendency, driven by changes to international tax rules, to try to locate as much substance as possible in one particular place: for example, if – perhaps because of Brexit – a fund manager is located in Luxembourg, it will often make sense to put the holding companies there as well.

the Government's view is that it would be more sensible to create a brand new regime for UK holding companies

Rather than tweak the existing rules, the Government's view is that it would be more sensible to create a brand new regime for UK holding companies, and there is some logic to that, especially given that simplicity is a key success factor. The current view is that the tax privileges should only be available to structures pooling capital from a fairly wide range of investors that are managed by a regulated and independent manager where the intermediate vehicle is playing a facilitative and generally passive role. This seems like a sound approach but, of course, the devil will be in the definitions of each of these concepts.

For example, one problematic issue is the way in which the current proposals test the breadth of the investor base to ensure that it is sufficiently diverse. Two suggestions are made in the consultation document and both have issues, although a workable solution could be crafted. In particular, the rules need to work in certain common situations where the members of the investor base hold their interests in a holding company indirectly, a point that the consultation document sees as open for discussion.

Another tricky area is how to avoid undue complexity in defining the types of company that cannot benefit from the tax exemptions. Of course, the Government needs to ensure that ordinary trading companies cannot take advantage of reliefs intended (broadly) to give tax neutrality to conduit vehicles, but drawing the line between deserving and undeserving structures will inevitably lead to some complexity. If the Government is prepared to move away from its traditional approach to the definition of a "trading" company – which causes real problems in practice – and adopt a clearer bright line test, there is more scope to give funds the certainty and simplicity that they are looking for.

All in all, the proposed regime would include some attractive tax features and, if the definitional issues can be satisfactorily resolved, there is hope that the UK could offer an attractive option to domestic and international funds. The Government – rightly – thinks that this would be good for the UK as a centre for asset management and believes that it is an objective worth some investment of resource.

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