UK Law and Practice Contributed by: Sam Kay, Philippa List, Mark Stapleton and Nicolas Kokkinos, Dechert LLP
2.6 Tax Regime General
located) is a wish to minimise withholding taxes on their returns from the fund, due, if nothing else, to the administrative and cashflow cost. From a UK tax perspective, a further important issue will be whether the fund would be consid - ered to be trading. This can be relevant at both fund and investor level, as the tax privileges for certain UK fund types and investor classes do not extend to trading profits (eg, UK-registered pension schemes are generally exempt from tax on their investment income and capital profits but this exemption does not apply to trading profits). This can have an impact on the chosen structure. Similar concerns can arise for inves - tors in other jurisdictions. Private Closed-Ended Funds Structured as English Limited Partnerships Tax position of the fund and investors As mentioned in 2.1.1 Fund Structures , the typi - cal structure of a UK private equity or venture capital fund is the English limited partnership. These are transparent for UK direct tax pur - poses, which means that each limited partner is subject to tax on the income and gains allocated to it under the limited partnership agreement (whether they are distributed or not), rather than the limited partnership itself being taxable on its income and gains. The taxation of investors on their share of the limited partnership’s income and gains depends on the nature of the underlying return that the partnership has received (eg, capital gain, inter - est, rent or dividend) and the investor’s own tax status. English limited partnerships typically make pay - ments to limited partners in the form of repay - ment of the loan element of the limited partners’ partnership contribution and distribution of part -
Different tax regimes apply to the different forms of UK investment fund. These are complex, and a detailed summary of them is beyond the scope of this chapter, but a high-level overview of some of the key direct tax features of common UK fund structures (at both fund and investor level) is set out here for AIFs and under 3.6 Tax Regime . Please note that the features described are necessarily general and may not apply in cer - tain cases – eg, depending on the assets held by the fund or the circumstances of particular investors. As a general point, the tax structuring preference of an investor will depend on its particular iden - tity and the asset class or classes in which the fund invests. Many funds will have a wide mix of different types of investors (eg, UK resident corporates – such as life assurance companies – and individuals, sovereign wealth funds and pension funds). Fund managers will then usually look to structure the fund so as to be tax efficient for the investor base as a whole rather than a particular investor or class of investor (unless, of course, a particular investor or class is especially important or has been specifically targeted). A key issue for all investors will typically be tax neutrality when investing through a fund (wher - ever that fund is established) – ie, they will not want that investment to leave them in a worse tax position than they would be in if they direct - ly held the underlying assets instead. Investors will also commonly not want to be subject to tax filing obligations in new jurisdictions solely because of their investment in the fund, or, if that is not possible, they will commonly want to be made aware of the relevant filing obligations by the fund manager. Another factor for investors when investing in funds (wherever the funds are
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