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HMRC internal manual

International Manual

Non-residents trading in the UK: through UK investment managers, brokers or Lloyd’s agents: the 20% rule: transparent and opaque funds

As with any other tests for the exemption, unless specified otherwise, the UK tax rules regard companies, including LLCs, as opaque and the CTA 2010 rules apply. Partnerships (including LLPs to which s 863 ITTOIA/1273 CTA 2009 apply) are transparent for income and corporation tax purposes:  CTA 2010 rules will apply to partners within the charge to CT and ITA 2007 to partners within the charge to IT. In addition, the rule for non-resident companies at S1149 CTA 2010 treats partnership collective investment schemes in which they invest as assumed companies for the purposes of the 20% test.

In the case of non-residents investing in a tax-transparent fund i.e. one where the beneficial entitlement to the income rests with the participant rather than the fund itself, e.g. a partnership (whether limited liability or not), the 20% rule would be automatically broken for all of the non-resident participants where even one of them was connected to the investment manager. This would be because under CTA10/S1122(7) and ITA07/S993(4) all of the participants would be deemed connected with each other as partners in the same partnership. The investment manager and connected persons (including all of the other partners in the partnership) would then be entitled to all of the income of the non-resident and the 20% rule would not be satisfied.

This would not necessarily accurately reflect whether the investment manager had an independent status from the otherwise unconnected non-resident participants. Therefore, in the case of transparent collective investment schemes (as defined at Section 235 of the Financial Services and Markets Act 2000) which would otherwise fall foul of the connected party rules, the 20% rule is applied by looking at the scheme as a whole as though it were a notional company with the participators having share participation. In this way, it is not relevant that the investment manager may be connected to the non-resident as partner, or that the non-residents themselves carry on a financial trade. The availability of the exemption is instead tested solely by reference to the nature of the activities of the notional company represented by the scheme (ITA07/S824 and CTA10/S1149).See the examples at INTM269140 and INTM269150.