The new taxation regime for qualifying asset holding companies (QAHCs) was released in July 2021 as part of the draft legislation in the Finance Bill 2021-22. This new taxation regime was created to allow the United Kingdom as a means to compete with Luxembourg as a premier holding company domicile for foreign legal entities.
The term “asset holding companies” refer to corporations that hold the assets of investment funds of international investors. The new taxation regime implemented is a part of a wider assessment of the UK’s funds regime to establish reforms that can deliver positive outcomes for its financial sector and boost its marketability as an attractive jurisdiction for asset management and investment funds.
Luxembourg is customarily the primary, ideal destination for the formation of qualifying asset holding companies. The taxation regimes in these jurisdictions only tax QAHCs relative to the activities they assume while ensuring the continuous flow of capital, gains, and income between investors and their primary investments.
The QAHC taxation regime is exclusively available for specific types of investment arrangements and will only influence the taxation of profits from trading activities, real estate properties in the UK, and other intangible investments.
Eligibility Conditions for UK Qualifying Asset Holding Companies
A company is considered eligible as a QAHC in the following instances:
- Verified UK resident
- Meets activity and ownership provisions
- Company not listed or traded on a recognized stock exchange or public market
- Elected to be a QACH
Ownership element under the new taxation regime necessitates that 70% of investors are rated as good or category A investors. In essence, investors under Category A are those who own diverse fund portfolios that are overseen by regulated managers, institutional investors, independent investors, and companies that offer long-term life insurance products.
The activity condition will be fulfilled in the following conditions:
- Primary activity of a QAHC is investing its funds with the objective of investment risk spreading, thereby providing investors benefits from the outcomes of its fund management strategy.
- Other activities are carried on to any substantial extent. To put things into perspective, substantial extent translates to more than 20% of a company’s overall business activities.
A qualifying asset holding company will benefit from tax advantages which place investors in a good tax position that they would not otherwise take advantage from if they decided to hold underlying investments directly.
The main features of the QAHC regime include:
- Exemption on capital gains from an overseas property.
- Capital gains and disposal of shares or units will be exempted. This will include all interests in a company with no share capital, with the exemption of companies that derive more than 75% of its assets from real estate based in the United Kingdom.
- Income treated as capital on buyback of shares by a QAHC.
- Profits exemption from overseas property businesses, wherein profits are assessed with tax in a foreign jurisdiction.
- Reduction on certain interest payments that would otherwise not be considered as distributions, including interest paid on profit participation loans.
- Stamp duty exemption and stamp duty reserve tax on the repurchase by a QAHC of its own shares and loan capital. This excludes exemption on transfer of shares in the QAHC.
- The new regime also features terms to safeguard against potential abuse and avoidance.
- Withholding tax exemption on interest payments to QAHC investors.
UK QAHC Timeline
The legislation draft only showcases the initial provisions of the new framework for taxing QAHCs. Furthermore, it also focuses on the qualifying terms for a company to be eligible as a QAHC. The legislation draft was open for consultation until 14 September 2021 for the purpose of stamp duty tax, stamp duty reserve tax, and corporation tax. For capital gains and income tax, the new regime will be in effect starting 6 April 2022.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.