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HMRC internal manual

Company Taxation Manual

Authorised investment funds (AIFs): qualified investor schemes: consequences of breaching the genuine diversity of ownership condition

Where the genuine diversity of ownership condition (GDO) is not met in relation to an accounting period then the qualified investor scheme (QIS) will be taxed as though it is a close investment - holding company (CIC) under ICTA88/S13A (regulation 14B(3) SI2006/964).

The tax consequences of breaching the genuine diversity of ownership condition

Where a QIS is treated as a CIC, it will be chargeable to corporation tax (CT) at the full rate irrespective of the level of its profits or the number of associated companies and ICTA88/S468 (1A) and 468A (1) for authorised unit trusts and open-ended investment companies respectively, will cease to apply (regulation 14B(2)(c)&(d) SI2006/964). The total profits should be calculated in the normal way for a company. There will be no special restrictions for CICs, for example, on the deduction of interest payments, annual payments or (if it is also an ‘investment company’ as defined in ICTA88/S130) management expenses under ICTA88/S75.

However, as a CIC any capital gains accruing to the QIS will become chargeable to CT and so the exemptions under TCGA92/S100 and the exception toTCGA92/S99 (1) (both as modified by regulation 100 SI2006/964) will not apply under regulation 14B(2)(e)&(f) SI2006/964.

For further guidance on the taxation of CICs, please refer to CTM60700.

Normal tax rules that apply to distributions from UK resident companies will apply to an investor in a QIS that is treated as a CIC.

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When do the tax consequences apply?

Where a newly established QIS fails to meet the GDO from the outset, it will in general, be subject to tax as though it was a CIC as soon as it was established.

Where an existing QIS fails to meet the GDO after the end of the first accounting period (AP) ending on or after 1 January 2009, then it will be treated as a CIC from the beginning of the second AP beginning after the 1 January 2009.

In the case of a QIS that subsequently fails to meet the GDO then it will be subject to the CIC rules from the start of the accounting period in which it failed to meet the conditions. (regulation 14B(1) SI2006/964.)