TAX & LEGAL ISSUES ASSET MANAGEMENT Kevin Cummings, Tax Partner (BDO) Claire Cummings, Partner (Cummings Law) March 2015
Contents Disguised fee draft legislation Diverted profits tax BEPS and UK action on hybrid instruments FCA and Gabriel EMIR clearing obligations Miscellaneous FCA/AIFMD matters
Disguised Fee Income Draft (1) New section 809EZA ITA 2007 Disguised fee arising to an individual from a collective investment scheme Provision of investment management services Management fee & exclusions Carry and co-invest Problems with the drafting
Disguised Fee Income Draft (2) US Co US Person UK Investment Management Services UK PE House Fee Carry & Co - Invest Vehicle Investment Management GP Priority Share LP Investors Co Invest Return & Carry 6% Hurdle Fund Principal + 6% Compounded (Whole of Fund) Realisation of Investments Portfolio Company Portfolio Company Portfolio Company
Diverted Profits Tax (1) Avoided PE charge (section 2) Non-UK resident company UK activities and supply to UK customers Structure designed to avoid UK PE? Tax mismatch condition Tax avoidance condition
Diverted Profits Tax (2) Insufficient economic substance charge (section 3) Arrangement between UK resident and another person (non-uk probably) UK resident and non-resident connected Tax mismatch outcome Lack of economic substance Entities are not small or medium-sized
Diverted Profits Tax (3) Application of DPT to offshore/onshore manager structure Application of DPT to funds investing in debt + equity Management Fee Investors Jersey Manager Management Services Cayman Hedge Fund PPN Interest Lux Fund PPN Subscription Advisory Fee Advisory Services Irish S.110 SV UK Advisor Loan Interest Interest Bearing Loan 100% Equity UK Asset Holding SPV
BEPS and Hybrid Mismatches (1) 2013 OECD 15 point Action Plan Action 2:Hybrid Mismatches HMRC & HMT Consultation document on Hybrid Mismatches (December 2014) Example of mismatch hybrid instrument Under the laws of country A, these payments are treated as dividends and exempt from tax A Co Loan from A Co to B Co under hybrid instrument Country A Country B Payments from B Co to A Co B Co Under the laws of country B, these payments are treated on interest payments, which are tax deductible
Hybrid Mismatches (2) Luxembourg Securitisation Company Luxembourg Profit Participating Loans Luxembourg CPECs Investors Payment Portfolio Company (Exempt Dividend) Deductible Interest PPL Advance Overseas Co Lux Co PPL Interest (Exempt Dividend) Deductible Interest CPEC Subscription Overseas Co Lux Co Yield under CPEC linked to profitability of underlying investments CPEC = debt in Luxembourg and equity in US Interest Interest + Dividends Loan Advance Dividends Securitised Distressed Asset Pool Assets Op Cos
REGULATORY UPDATE March 2015
THE FCA AND GABRIEL Reporting required from full-scope, small authorised and small registered AIFMs Transparency information required on the AIFM and the AIF Frequency of reporting depends on particular characteristics see SUP 16.18 and FUND 3.4 for full-scope AIFMs Reporting dates follow the calendar year Reporting on: (i) feeder funds; (ii) umbrella/sub-funds ; and (iii) funds of funds Reporting forms follow templates: (i) AIF001 the Manager Report; and (ii) AIF002 the Fund Transparency Report You are responsible for reporting Gabriel now works
EMIR Central clearing for certain standardised OTC derivatives Application of risk litigation techniques for non centrally cleared OTC derivatives Reporting of all derivative transactions to trade depositories 11 July 2014 ESMA publishes two consultation papers on clearing IRS and CDS 1 October 2014 ISDA confirms classes of IRS to be cleared No single, commonly adopted definition of derivative 29 September 2015 ESMA consultation on definition of derivative January 2015 ESMA publishes responses
OTHER ISSUES FCA feedback on dealing commission regime AIFMD consultation on asset segregation FCA consults on changes to FUND Calculating earn-outs in a share sale agreement Creating a collective investment scheme by accident
BDO LLP 55 Baker Street London W1U 7EU +44 (0)20 7893 3754 kevin.cummings@bdo.co.uk www.bdo.co.uk Cummings Law Ltd 42 Brook Street London W1K 5DB +44 20 7585 1406 claire.cummings@cummingslaw.com www.cummingslaw.com