UK Law and Practice Contributed by: Sam Kay, Philippa List, Mark Stapleton and Nicolas Kokkinos, Dechert LLP
definition of a bond fund therefore depends on the level of interest income and deductible man - agement expenses. Any corporation tax paid by an OEIC or AUT is not creditable for investors. No withholding tax should apply to distributions paid to investors by OEICs or AUTs. Because their income profits are taxable at the basic rate of income tax, OEICs and AUTs are “subject to tax” for double tax treaty purposes. As such, they can benefit from the UK’s exten - sive network of double tax treaties, which can help reduce withholding taxes in other jurisdic - tions and assist in claiming credit for foreign taxes incurred on foreign sources of income. It is possible for OEICs and AUTs to elect to be treated as “tax elected funds”, which would modify the tax treatment relating to OEICs and AUTs from that discussed above. However, in practice, the uptake of this regime has been low, so it is not discussed further here. The regime is most appropriate for funds with a mix of debt and equity investments that do not qualify for bond fund treatment. Tax position of the investor UK tax resident individuals will be taxed on dividend distributions in the same way as for dividends they receive from normal companies. Therefore, UK tax resident individuals will be subject to income tax, at rates of up to 39.35%. However, for UK corporation taxpayers, the nor - mal dividend distribution rules do not apply (ie, that dividends received from a UK corporate are usually tax exempt in the hands of a UK corpo - rate taxpayer). Instead, special anti-avoidance rules need to be considered (called the corpo - rate streaming rules), which are designed to prevent corporate investors using OEIC or AUT
structures to convert interest-type income into exempt dividend income. The rules are compli - cated, but in general terms dividend distributions are streamed into franked and unfranked parts following a formula set out in the legislation. In effect, the aim is to tax corporate investors as if they had invested in the underlying assets of the OEIC or AUT directly. Interest distributions are, broadly, treated as interest receipts, so UK resident individuals will be subject to income tax (at rates of up to 45%). Corporation taxpayers are required to treat their units in bond funds as creditor loan relationships for the purposes of the corporation tax rules relating to corporate debt. PAIFs Tax position of the fund As mentioned above, OEICs that invest in real estate can be structured as PAIFs (provided the necessary conditions are met). PAIFs are subject to a significantly modified version of the OEIC tax regime described above. An important extra benefit of the PAIF status is that, broadly, a PAIF (unlike a normal OEIC) is exempt from corpora - tion tax on the net income of its property invest - ment business. Special streaming rules apply to PAIFs. Broadly, the total amount available for income allocation by a PAIF must be split into three pools com - prising property income distributions, interest distributions and dividend distributions. Interest distributions should be deductible expenses for the PAIF when calculating the net income of the non-tax-exempt part of its business. Payments of property income distributions are subject to withholding tax (currently at 20%), unless an exemption applies (for example, if
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