IFM40240 - Eligibility criteria: category A investors: meaning

FA22/SCH2/PARAS 8 and 9

PARA 8 provides that five categories of entity can be category A investors: QAHCs, qualifying funds, relevant qualifying investors, intermediate companies and certain public authorities listed in PARA 8(2).

PARA 9 defines a ‘qualifying fund’. Qualifying funds must be collective investment schemes or alternative investment funds, and they must meet a diversity of ownership condition.

This condition is met if the fund is not close (broadly adopting the rules set out in CTA10/PART10/CH2 as modified by TCGA92/SCH5AAA), or if it is at least 70 percent controlled by category A investors.

Additional modifications to the close company rules over and above those shared by TCGA92/SCH5AAA are adopted for these purposes:

  • when applying the control test in CTA10/S450, interests of loan creditors are disregarded for both the income and asset distribution tests, and a different definition of loan creditor is used for that purpose which excludes lenders of normal commercial loans. The exclusion applies both to prevent lenders of normal commercial loans becoming participators by reason of those loans, and also to remove from consideration any interest a participator has by reason of a normal commercial loan which they have lent.
  • managers and general partners of funds are not to be taken to control those funds otherwise than by reason of voting rights or economic interests, so their day-to-day control will not be relevant to the closeness test.

Additionally, funds may qualify if they comply with the genuine diversity of ownership (GDO) conditions in the Offshore Funds (Tax) Regulations 2009 as modified by PARAS 9(3) and (4). See IFM17100+ for more information on the GDO conditions.

However, to qualify under the GDO route, a fund must be either:

  • a collective investment scheme (CIS); or
  • an alternative investment fund which not a CIS only by virtue of being a body corporate (for example, certain overseas partnerships which may be treated as a body corporate).

The effect of these rules is that a fund structured as a closed-ended corporate (which cannot be a CIS) must meet the not close test or the 70 percent category A controlled test, unless it is an alternative investment fund which is not a CIS solely by virtue of being a body corporate.

In determining whether a fund is close, any entity in the ownership structure of the fund that is transparent should be regarded as such, and so not treated as a person in its own right. This is the case even if the entity is a transparent qualifying fund, and so effectively treated as a person in determining ownership of relevant interests in a potential QAHC. (Note that that the rule treating a transparent qualifying fund as a person in PARA 6 applies only for the purposes of PARAS 3 to 6; with that rule not applying to PARA 9, normal corporation tax/CGT rules apply.) If this was not the case, a fund whose ultimate ownership is genuinely diverse could be treated as close where, for instance, it was more than 50 percent owned by a transparent qualifying fund.

Funds which do not meet either of these criteria can still be treated as category A investors if they are at least 70 percent controlled by category A investors. Here again, transparent entities in the ownership structure of the fund being tested should be respected as such, although in applying this test, there is an exception to this rule. A transparent qualifying fund which is a category A investor by virtue of meeting the GDO condition is to be regarded as an opaque entity in applying the 70 percent controlled test. This is necessary, as otherwise a GDO compliant fund which was close could lead to the fund being tested being close, but not saved by the 70 percent rule, despite being (say) 80 percent owned by the GDO compliant fund.

The 70 percent controlled test looks to voting rights, rights to distributions of profits and rights to assets on a winding up, and is based on the criteria applied by CTA10/S450(3) for testing the interests of participators in close companies. However, unlike S450(3), it counts indirect interests held through other companies. These should be assessed in the usual way, so if a person holds a 50 percent interest in Company A which in turn holds a 60 percent interest in Company B, the person should be regarded as having a 30 percent interest in Company B.

A fund structured as a limited partnership will typically be run on a day-to-day basis by its general partner and investment manager. However, despite day-to-day control resting with those entities, limited partners will generally have voting rights in relation to limited matters (such as any question of replacing the general partner or investment manager, or changes to the constitution of the partnership). The test of voting power in relation to such a fund should be applied by reference to those voting powers of limited partners, reflecting the intention of the test to identify the real owners of the fund.