UK reverses position on fee rebates

UK GPs will not have to pay withholding tax on transaction fees paid to foreign LPs - a worry under the Treasury's prior proposals, which Treasury Economic Secretary Sajid Javid has reversed.

HM Treasury will amend its current position on withholding taxes so that non-UK investors will not be penalized. 

A previous proposal from the UK’s tax collector HM Revenue & Customs had stated that fee rebates – defined as payments to fund investors made by entities other than the fund itself – should be paid subject to a withholding tax and should be taxable for all investors.

Sajid Javid

This caused concern for fund managers as the breadth of the proposal meant it would have impacted offshore investors receiving rebates who are not normally subject to a withholding tax on these distributions. UK resident investors – with the exception of UK corporations, charities and pension funds – are subject to the tax, however. 

Legal sources speaking with PE Manager said transaction fees paid to investors were a particular area of related concern for the private equity industry. If paid through the firm's management company they would have been caught by HM Revenue & Customs' prior proposal and been subject to tax. 

Sajid Javid, Treasury Economic Secretary, reversed that position by issuing a ministerial statement that said charging withholding tax would have a “profoundly negative impact on the international competitiveness of the UK funds industry”. 

Now the government will repeal the withholding tax levied on rebates made to investors who are not resident in the UK for tax purposes. This means that only UK individual investors, certain trustees and partnerships should remain within the scope of the withholding tax.