UK expected to clear AIFMD tax ambiguity

The UK government is working on proposals to eliminate some unintended tax consequences resulting from the pan-EU Alternative Investment Fund Managers Directive (AIFMD).

It’s possible some fund managers subject to the directive will suffer a “dry tax”, or tax on illiquid earnings, when meeting some of the remuneration rules under the directive, which took effect in July. UK tax authority HMRC is aiming to prevent that dry tax from being applied to GPs who must under the directive defer at least 40 percent of their variable remuneration over at least three to five years.

GPs in the UK who are partners at the firm must pay income tax and national insurance tax on their share of the firm’s trading profits, regardless if those profits are actually distributed out immediately. Under proposals expected in early December, according to legal sources, HMRC will defer those taxes until the variable pay is actually in GPs’ hands.

Multiple legal sources tell PE Manager that carried interest will also be interpreted as variable remuneration under the directive, but that its treatment as a capital gain does not present the same dry tax unintended consequence.

“The UK tax rules have not kept pace with regulatory changes,” said a client alert from law firm Fried Frank Harris Shriver & Jacobson. Adding HMRC and the UK’s securities regulator, the Financial Conduct Authority, are working together to ensure fund managers can be compliant with the AIFMD without an extra tax burden.