Qualifying Asset Holding Company (QAHC) Regime

The Qualifying Asset Holding Company (“QAHC”) was introduced with the UK's Finance Bill 2022 in a bid to compete with other European jurisdictions that have well-established financial services sectors. The regime aims to mitigate obstacles that have historically precluded the extensive use of UK entities for asset holding structures. A QAHC is a UK tax-resident investment company that must meet specific conditions - chief among them being that it operates primarily as an investment vehicle and that at least 70% of its relevant interests are held by "Category A investors". These investors are broadly defined as sophisticated and institutional entities, including other QAHCs, qualifying funds, certain public authorities and specific types of intermediate companies. The full eligibility criteria for QAHC status are outlined below.

The regime is particularly attractive to investors as it allows them to invest efficiently in shares, debt and overseas land. To enter the regime, a simple notification is required to be submitted to HMRC. Upon receipt, HMRC will assess whether the company meets all the criteria for qualifying as a QAHC. The notification requires a unique tax reference of the company and the date of entry, as well as a declaration that the company meets all the eligibility requirements.

Below, we outline the eligibility criteria a company must meet to qualify for QAHC status, along with the taxation and operational benefits available under the regime to companies that meet these conditions.

Eligibility Criteria

As outlined above, a fundamental requirement for a QAHC status is that at least 70% of the company’s shares must be held by Category A investors. If more than 30% of the company’s shares are held by non-Category A investors, the entire company will not qualify as a QAHC.

In addition to this ownership condition, a company must also meet a number of structural and operational criteria to be eligible. Specifically, the company must be:

• UK tax resident;

• Not a REIT or securitisation company;

• None of its equity securitised listed or traded on a public market or exchange;

• An entry notification is made to HMRC;

• The main activity of the company much be the carrying on of an investment business; and

• The company’s investment strategy much not involve the acquisition of equity securities listed or traded on any public market or exchange.

The final two criteria, relating to the company’s activity and investment strategy, are further defined in the legislation and HMRC guidance, which set out detailed conditions and limited exceptions.

The Activity Condition requires that the company’s main activity must be the carrying on of an investment business. Any other activities must be ancillary to that investment business and not carried on to any substantial extent.

The ‘Investment Strategy Condition’ states that a company’s investment strategy must not involve the acquisition of equity securities listed or traded on any public market or exchange, except when it facilitates a change of control for the issuer, resulting in the securities no longer being listed or traded. Provided that certain conditions are met, it is possible for a company to elect out of the Investment Strategy Condition. If a company chooses to elect out of this condition, the corporation tax exemption that usually applies to distributions received by a company is ‘switched off’ for its listed or traded equity securities.

Ownership Conditions

Under the Regime, Category A investors include a range of institutional investors such as most pension funds, charities and authorised long-term insurance businesses. Additionally, qualifying investment funds are also classed as Category A investors under the regime. On a high level, these are (i) Collective Investment Schemes or Alternative Investment Funds.

Another condition that a company must satisfy to qualify as a QAHC is the Genuine Diversity of Ownership (“GDO”) condition. This condition aims to ensure that the company is widely held by a diverse group of investors and not controlled by a small number of related parties. The GDO condition applies to both the company itself and any other entity that holds more than 10% of the company's shares or voting rights.

The GDO condition is met if either of the following tests are satisfied:

The GDO condition is intended to prevent the QAHC regime from being used for tax avoidance purposes by individuals or closely connected groups. It also ensures that the regime is aligned with the OECD's recommendations on preventing the artificial avoidance of permanent establishment status.

Main Benefits of QAHC Regime

The main benefit of being a Category A investor under the QAHC regime is that the investor can receive distributions from the company without incurring any UK tax liability. This is because the distributions are treated as capital returns rather than income for tax purposes. The investor can also dispose of its shares in the QAHC without triggering any UK tax charge on the gain, provided the shares are not related to UK land. These advantages make the QAHC regime attractive for Category A investors who want to invest in a range of assets, including overseas property and unlisted companies, through a UK-based vehicle.

The QAHC regime aims to provide significant tax benefits by adjusting or exempting certain aspects of the UK tax system, ensuring that investors have an equally advantageous experience using a QAHC platform as they would investing directly. One of the most attractive benefits of QAHCs is that they are exempt from corporation tax on realised gains when they sell shares, although this is subject to some restrictions. Additionally, interest payments and dividends are not subject to withholding taxes. The regime also exempts various rules that deny or delay deductions for finance returns on shareholder debt, including those treating convertible securities as distributions and those delaying deductions for late interest or deeply discounted securities, ensuring deductions on an accruals basis.

Payments made by a QAHC on the redemption, repayment, or purchase of its own shares are treated as capital gains distributions within the capital gains regime, unless the shares are held by a portfolio company executive. This exclusion allows investment managers to benefit from capital treatment. The regime also allows for the ringfencing of various operations, treating the company as two separate entities - one performing QAHC tasks and the other carrying out regular business activities. Losses are not transferable between these entities and asset transfers crossing this boundary are treated as sold and repurchased at market value, with concessions available if gains have already been taxed. This structural separation within the QAHC ensures clarity in tax treatment and operational focus, aligning with investor expectations for transparency. It mirrors, in principle, the compartmentalisation seen in Luxembourg SPVs, though implemented through tax rules rather than legal entity segregation.

QAHCs benefit from financial VAT exemptions when providing services, particularly to clients outside the UK, allowing for input tax recovery and enhancing their appeal. Transfer pricing regulations apply to all QAHCs, regardless of size, with a more stringent application to prevent tax avoidance. The regime also permits QAHCs to repurchase their shares in a tax-efficient manner, treating profits from share buyback programs as capital gains for distribution purposes, though share buybacks are subject to considerations under UK corporate law when the QAHC is incorporated in the UK.

Existing companies in the UK can access the regime by informing HMRC when they join, starting a new accounting period for tax purposes, which ends when they leave. QAHCs can opt out voluntarily by informing HMRC, and HMRC can remove a QAHC from the regime if it violates the conditions. Joining or leaving the regime means that shares and foreign property assets are considered as bought and sold at market price. However, if these assets are eligible for the Substantial Shares Exemption except for being held for less than 12 months, the SSE still applies if conditions are satisfied after 12 months. Asset reacquisition rules are not relevant when a non-resident company moves to the UK 30 days before becoming a QAHC, making such relocation more attractive.

Take Aways

In conclusion, the QAHC regime offers a number of tax advantages for UK-based holding companies that meet certain conditions and invest in qualifying assets. The regime allows for reduced taxation of interest income, capital gains, and share buybacks, as well as enhanced VAT recovery and transfer pricing rules. The regime also provides flexibility for entering and exiting, and a mechanism for correcting inadvertent breaches. However, the regime also imposes strict requirements on the activities and ownership of the QAHCs and may not suit every structure or investor profile.

For more information on UK QAHCs, please reach out to Niamh Manning or Rolando Ebuna.