UK eases AIFMD tax concerns

New AIFMD regulations will not push HMRC to reclassify offshore funds as ‘UK-controlled’ for tax purposes.

Offshore funds managed from the UK will not be treated as resident in the UK, and thus taxable in the UK, after the UK government extended an exemption of its Finance Act for alternative investment funds.

The industry had been concerned that, due to new oversight and management requirements under the recently implemented Alternative Investment Fund Managers Directive’s (AIFMD), a UK-based fund manager would take on full managerial control of an offshore fund, thus making it a tax resident. Traditionally such offshore funds are managed by a board of directors resident offshore.

More specifically, the central management and control test requires offshore funds to have a majority of non-UK directors (and a majority of directors not connected to the UK fund manager) and to hold all board meetings outside the UK.

To encourage the competitiveness of the UK fund industry (and to permit non-UK funds to be managed from the UK without fear of UK taxation), the tax authority HMRC said an offshore fund will never be treated as tax resident in the UK, regardless of whether its central management and control is exercised from the UK.