UK Law and Practice Contributed by: Sam Kay, Philippa List, Mark Stapleton and Nicolas Kokkinos, Dechert LLP
greater flexibility, with differing borrowing and investment restrictions, and are popular for real estate investment through the PAIF structure. 3.5 Fund Finance UCITS funds are subject to prescriptive rules on borrowings, as prescribed under the UCITS Directive. A UCITS is permitted to borrow money for use by the fund, provided it will be repaid out of the scheme property and does not conflict with any restrictions on borrowing that may have been included in the fund’s Instrument of Incorpora - tion. This borrowing is permitted on a purely temporary and infrequent basis, and must not exceed 10% of the total value of the fund’s assets on any day. Prior consent for any bor - rowing must be obtained from the depositary, or for periods of borrowing that may exceed three months. The same 10% borrowing limit applies for NURS, but there is no restriction on the length of time for which a NURS may borrow. QISs have the ability to borrow up to 100% of the fund’s NAV. Where derivatives are used, a QIS must ensure that its total exposure to derivatives does not exceed its NAV. 3.6 Tax Regime General See 2.6 Tax Regime (General). OEICs (Other than PAIFs) and AUTs Tax position of the fund OEICs and AUTs are subject to UK corporation tax, but are exempt from tax on chargeable gains from the disposal of assets (provided that the gains do not represent profit on trading trans - actions). Furthermore, if these funds satisfy the “genuine diversity of ownership” condition
(GDO), then certain capital profits from invest - ment transactions should be treated as exempt capital gains. For the GDO to be met, the fund must be sufficiently widely marketed. An LTAF can also be treated as meeting the GDO if at least 70% of its shares or units are held by cer - tain institutional investors (or by the manager of the fund in its capacity as manager). Failure to meet the GDO has wider consequences for QISs and LTAFs, such that, broadly, they are taxed under normal corporation tax rules rather than the (more generous) ones that typically apply to authorised funds. OEICs and AUTs can also potentially benefit from the general exemption from corporation tax on dividends. OEICs and AUTs must allocate for distribution as dividends or interest the total amount avail- able for income allocation. An OEIC or AUT can only show an amount as available for distribution as interest if it meets the qualifying investments test (such funds are often called “bond funds”). Broadly, it meets this test if the market value of investments that produce interest (or a return similar to interest) exceeds 60% of the market value of the fund’s total investments. If this test is met, the distribution is generally allowable as a deductible expense for the fund for corporation tax purposes. The net effect of the tax deduction is that bond funds should typically have little to no tax leak - age at the level of the OEIC/AUT. If the quali - fying investments test is not met, then all of the income available for distribution must be classed as dividends (and there would be no corresponding deduction for such payments by the fund to the extent interest is included in such distribution). Whether or not any corporation tax will be payable for a fund that does not meet the
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