IFM36319 - Disguised fees: Condition 2 - A management fee arising to the individual (from 22 October 2015 onwards): Corporate general partners

Corporate general partners

General partner and partner attribution

Where a corporate general partner of a limited partnership fund pays a fund management business for investment management services, ITA07/S809EZDB(10)(b) does not attribute the interests of partners when judging whether a company is connected with an individual.

However, this would not preclude such a general partner company being connected with an individual who owned a majority stake in the fund management business. 

Enjoyment conditions

The enjoyment conditions are explained in guidance at IFM36330 onwards. Where the corporate general partner is located in the UK (or another jurisdiction which is not a low tax jurisdiction and has a comparable level of taxation to the UK) the enjoyment conditions (a) and (e) will be deemed not to be met under ITA07/S809EZDB(7) where;

  • a sum arises to a connected company which is liable to corporation tax on its profits; and
  • the sum received is brought into account when computing those profits.

If a corporate general partner receives a priority profit share and uses this profit share (or has used an advance received in respect of this profit share) to make payments to the investment management business for services provided to the limited partnership fund, the amounts should be included in the trading profits of that investment management business.  The enjoyment conditions will not be met.

Where, for example, a sum is paid;

  • via a structure designed to remunerate the fund management team in a tax efficient way (including a payment to what is in substance a “cash box” located in a tax haven, even if the payment is nominally in return for marketing or investor relationship management services) or
  • to divert some of the priority profit share away from the onshore financial centres where the investment management teams are based,

the enjoyment conditions are capable of being met and the sum received by the corporate general partner will be capable of arising to the individual who may benefit from those amounts.

The inclusion of “part of the sum” in the opening words of ITA07/S809EZDB(5) means that where part of the priority profit share received is paid to the onshore manager and part is retained offshore, only the latter will fall outside the above analysis and come within ITA07/S809EZDB.

Whilst the above paragraphs are written on the basis of a private equity fund type structure with a corporate general partner, the analysis is also valid in structures commonly encountered with alternative funds such as with a corporate master fund in Cayman.

In circumstances where the direct management entity is another Cayman company which then appoints a UK entity (or entities in a number of financial centres) to effectively manage the fund, to the extent that the fee is paid on to the onshore managers and brought into account as trading income the enjoyment conditions in ITA07/S809EZBD will, generally, not be satisfied.   

Note that in some structures instead of providing discretionary management services, the onshore vehicle may be termed an advisor and provide advisory services.