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Funds Annual Briefing 2021 - Recap: what you may have missed

Funds Annual Briefing 2021 - Recap: what you may have missed

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Implications of Covid-19 for fund managers

The global Covid-19 pandemic is an unprecedented situation that will have a long-term impact on the alternative funds industry, stretching beyond the current period of lockdown and altering the way in which funds are raised and operated. Whilst there will be some market participants who have navigated prior economic downturns, the current crisis is throwing up challenges that few people will have prepared for. There will also be some within the industry who have only known a period of relatively steady growth over the last 10 years. There is little doubt that the period of calm is being replaced by a period of turbulence.

The private funds market has not stood still over the last 10 years and there are a number of recent innovations and developments that are now being tested, from the prevalence of subscription line facilities, to the way that valuations and fund reporting are carried out to the increasing interest in GP-led transactions as a form of liquidity. But this crisis will also give opportunity for new products and approaches to be developed and put into practice.

In his article, 'Private Fund Management Issues arising from Covid-19' (published as part of ICLG's Guide to Alternative Investment Funds), Funds Partner Sam Kay examines in detail the key issues that private fund managers should be considering in the short and medium term to best adapt to the new environment and to prepare for the future. This covers operational issues, effective investor relations during the market dislocation, liquidity and risk management and some considerations for future planning.

As to investment companies, the government and regulators have introduced the relaxation of a number of regulatory and statutory requirements to allow funds and their managers time to deal with the impact of the crisis. The majority of these relief measures were temporary and have come to an end although, in some cases, the measures have been extended and continue under review. The measures still in place at the time of writing include:

  • Virtual company meetings and flexibility in holding AGMs: the government has extended the relaxations to the company meeting requirements until 30 March 2021, with the relaxations applying to meetings held on or before that date. Under the relaxations, shareholder meetings can take place by electronic or any other means, notwithstanding the provisions contained in the Companies Act 2006 or a company’s articles of association. The participants need not be in the same place and shareholders do not have a right to attend in person; and

  • Extension of company filings: the deadlines relating to both annual and half-yearly financial statements have also been extended. Listed companies have an additional month to submit their interim reports and an additional 2 months from their year-end to publish their audited financial statements. The end dates for these relaxations depends upon on individual companies’ interim and year end dates but, at a minimum, are available in respect of financial periods ending before April 2021.

For the latest developments relating to Covid-19, see the Covid-19 page of our website.

AIFMD Review by the European Commission

What is this?

Public consultation on potential amendments to the EU AIFMD.

Who does this apply to?

EU AIFMs and EU AIF depositories.

When does this apply?

Not yet known.

In October 2020, the European Commission published its consultation on its review of the AIFMD. The publication of the consultation, which is in the form of a questionnaire, follows a previous report it had previously carried out in June 2020 and to which the European Securities and Markets Authority ("ESMA") had responded in a letter to the European Commission in August 2020 which contained a wide-ranging set of comments highlighting areas where ESMA believed improvements could be made.

The European Commission's consultation covers a wide range of subjects, including:

Functioning of the AIFMD regulatory framework, scope and authorisation requirements

The Commission seeks views on the overall functioning of the AIFMD framework and its effectiveness, the capital requirements for AIFMs, the provision by AIFMs of ancillary services (eg portfolio management services) and whether a Supervisory Review and Evaluation Process should be introduced into the AIFMD.

Investor Protection

The Commission asks whether the AIFMD should continue to cross-refer to the client classification sections in MiFID II in order to determine categories of investors or whether and how investor classification could otherwise be improved. It also considers how access to retail investors might be improved for AIFMs, including the possibility to structure a specific AIF for retail investors. Views are sought on the possibility of introducing a depositary passport and whether investor Central Security Depositories ("CSDs") should be treated as delegates. Questions relating to valuation are also included including a question on asset valuation during the recent pandemic and questions about the liability of external valuers.

International Relations

Of particular significance are questions raised on delegation, including whether the delegation rules are effective in preventing letter box entities, ensuring effective risk management, whether quantitative criteria or a list of core functions (that cannot be delegated) should be specified, which elements of AIFM Regulation's delegation rules could be applied to UCITS and whether the AIFMD standards should apply regardless of the location of a third party to which AIFM has delegated the collective portfolio management functions. The Commission also asks whether NPPRs create an unlevel playing field between EU and non-EU AIFs.

Financial Stability

The Commission asks whether the framework relating to financial stability should be enhanced, in particular around liquidity management and the availability of liquidity tools for AIFMs and supervisors. There are a number of questions on regulatory reporting, including whether LEIs should be mandatory, on AIF classification, and whether a similar reporting requirement should be introduced for UCITS. Feedback is also sought on the leverage requirements, including the current leverage measures in connection with the IOSCO principles and whether the leverage calculation methods for UCITS and AIFs should be harmonised. This consultation also includes questions on remuneration, leveraged loans and CLOs and on loan originating AIFs.

Investing in Private Companies

The Commission asks if the AIFMD rules regulating investing in private companies are achieving their aim to increase transparency and accountability of AIFs holding controlling stakes in non-listed companies, and if there are other ways of achieving these objectives more efficiently and effectively.


The consultation explores the appropriateness of the AIFMD rules when assessing sustainability risks, and the interaction with the Sustainable Finance Disclosure Regulation. The Commission asks about the quantification of sustainability risks, which is not currently required under the Sustainable Finance Disclosure Regulation, and whether to integrate principal adverse impacts and the EU Taxonomy into AIFM’s investment decision processes.

ESMA guidelines on liquidity stress testing in AIFs and UCITS

What is this?

New guidelines providing management tool aimed at increasing the standard, consistency and, in some cases, frequency of liquidity stress testing.

Who does this apply to?

Leveraged closed-ended EU AIFs, open-ended EU AIFs, and UCITS plus fund managers, depositaries and national competent authorities.

When does this apply?


ESMA's guidelines on liquidity stress testing ("Liquidity Guidelines") began to apply from 30 September 2020. In terms of scope and application, the guidelines apply in respect of leveraged closed-ended AIFs and also open-ended AIFs (and UCITS), (including exchange-traded funds) and, and will supplement the existing liquidity management requirements as set out in AIFMD (and the UCITS Directive).

Liquidity stress testing ("LST") is a risk management tool, within the overall liquidity risk management framework of a manager, which simulates a range of conditions, including normal and stressed conditions, to assess their potential impact on the funding, assets and overall liquidity of a fund and any necessary follow-up actions.

The Liquidity Guidelines state that fund managers should have a strong understanding of the liquidity risks arising from the assets and liabilities of the fund’s balance sheet, and its overall liquidity profile, in order to employ LST that is appropriate for the fund it manages.

The Liquidity Guidelines include obligations to design and build LST models and to produce an LST policy. The guidelines recommend that the LST policy should be documented within the AIF's Risk Management Policy (or the UCITS’s Risk Management Process). The guidelines also impose governance principles which require LST to be properly integrated and embedded into a fund’s risk management framework and subject to appropriate governance and oversight. LST should employ historical scenarios, hypothetical scenarios and, where appropriate, reverse stress testing. Where appropriate, managers should aggregate LST across funds under management to better ascertain the liquidation cost or time to liquidity of each security.

The Liquidity Guidelines also impose an obligation on depositaries to have appropriate verification procedures to check that fund managers have documented LST procedures in place.

Under the Liquidity Guidelines, LST should occur at least annually but quarterly or more frequent LST is recommended.

EU wide securities financing transactions' reporting obligations now includes AIFs and UCITS

What is this?

Reporting regime whereby counterparties are required to report details of securities financing transactions they have entered into to a Trade Repository.

Who does this apply to?

In a funds context, EU AIFs and EU authorised AIFMs, UCITS, UCITS management companies.

When does this apply?


The EU Securities Financing Transactions Regulation ("SFTR") has applied from 12 January 2016, although certain of its requirements entered into force on a phased basis. The commencement date for AIFs and UCITS in respect of the final set of substantive obligations under the SFTR (which relate to the requirement for counterparties to SFTs to report details of those transactions to a trade repository) was 11 October 2020 for AIFs.

In order to be able to comply with the reporting requirements, AIFs (and UCITS) need to establish internal procedures and relevant external legal arrangements (regarding, amongst other things, the collection of data and its onward transmission to a trade repository (or to a third party service provider who will report on their behalf)).

Points to note with regards to the reporting obligation include:

  • In terms of territorial scope, the reporting requirement applies:

    • to the principal counterparty to the transaction where it is established in the EEA; and

    • to an EEA branch of a non-EEA entity where the transaction is concluded through the branch (noting however that a non-EEA AIF would never in practice be operating out of an EEA branch and cannot therefore be within the scope of the SFTR reporting obligation);

    • according to ESMA, to a non-EEA AIF with an AIFM registered or authorised under AIFMD (i.e. regardless of the fact that the AIF is established outside the EEA). However, this was a passing comment from ESMA in its Final Report which accompanied its Guidelines on reporting under Articles 4 and 12 SFTRpublished on 6 January 2020; but this comment was not reflected in the Guidelines themselves nor does it appear to be consistent with the provisions of SFTR itself);

  • A reporting counterparty may appoint a third-party service provider as its delegate to report on its behalf (although the reporting counterparty will remain responsible and legally liable).

Reportable SFTs will include repos, securities and commodities lending transactions/securities and commodities borrowing transactions, buy sell backs and sell-buy backs and margin lending transactions.

Asset Management Taskforce report on integrating stewardship into investment process

What is this?

An HM Treasury-led taskforce report which provides a blueprint for integrating stewardship into the investment process.

Who does this apply to?

All asset managers with a UK nexis.

When does this apply?


In November 2020, the Asset Management Taskforce ("AMT") published Investing with Purpose: placing stewardship at the heart of sustainable growth, a report containing proposals designed to integrate stewardship more deeply into the investment process.

The AMT, led by HM Treasury, is a group of the UK's leading investment managers, stakeholders and regulators. The AMT's proposals aim to assist investment managers and asset owners in expanding their stewardship activity across different asset classes, and are set out under three pillars:

  • stewardship behaviours – which includes practical steps for strengthening stewardship across the full range of investments;

  • stewardship for clients and savers – to generate sustainable value and achieve clients' investment goals; and

  • economy wide-approach to stewardship – which aims to ensure the collective responsibility of market participants and stakeholders.
ESMA guidelines on performance fees in UCITS and certain types of AIFs

What is this?

Guidelines on the calculation and disclosure of performance fees.

Who does this apply to?

UCITS management companies and EU AIFMs of certain types of AIFs marketed to EU retail investors.

When does this apply?


In April 2020, ESMA published its final guidelines on performance fees (the "Performance Fee Guidelines") applicable to undertakings for collective investments in transferable securities ("UCITS"). Official translations were published in November 2020.

The publication of the Performance Fee Guidelines follows a consultation by ESMA in 2019. Whilst the purpose of the guidelines is to harmonise regulations relating to UCITS performance fees across the EU, the consultation also asked if the guidelines should also be applicable to AIFs marketed to retail investors in order to ensure equivalent standards in retail investor protection which caused some concerns within the closed-ended funds industry. Thankfully, the Performance Fee Guidelines expressly exclude closed-ended AIFs from the scope of the guidelines and clarify that the guidelines apply to (i) UCITS funds; and (ii) where Member States allow AIFMs to market to retail investors in their territory units or shares of AIFs they manage in accordance with Article 43 of the AIFMD, the guidelines also apply to AIFMs of those AIF.

The guidelines applied on 6 January 2021, and will be effective immediately for any UCITS or in-scope AIF created or starting to apply for the first time a performance fee model on or after such date. A transitional period is in place for existing UCITS and in-scope AIFs created prior 6 January 2021.

ILPA publishes model documentation

What is this?

New and updated model LPAs, term sheets, NDA and updated guidance on subscription credit lines.

Who does this apply to?

General Partners and institutional investors.

When does this apply?


The Institutional Limited Partners Association ("ILPA") has published a number of new and updated model LPAs and guidance over the course of 2020.

Deal-by-Deal Model LPA and Term Sheet

A new Model LPA funds using a 'deal-by-deal' waterfall structure, and accompanying Term Sheet, have been made available. The Model LPA is drafted for a Delaware limited partnership and includes the following provisions:

  • Clawback period: in addition to a final clawback, interim clawback calculations will be calculated by reference to a hypothetical final distribution of its assets. The Model LPA provides for annual interim clawback periods beginning one year from the end of the commitment period/GP removal/return of distributions by LPs to satisfy indemnities etc.;

  • Fiduciary Duty: Language has been added to clarify, for the avoidance of doubt, that, in exercising its discretion under the Agreement, the General Partner may not place its interests ahead of the interests of the fund or the Limited Partners; and

  • Expenses: ILPA has stated that it is wary of what it sees as a continuous shift of expenses to funds. The Model LPA seeks to clarify what should not be charged to the fund.

The Deal-by-Deal Model LPA includes footnotes containing lots of guidance and a number of provisions offer choices, the idea being that GPs and LPs can use the document as a starting point for negotiations, or as a benchmark. Both the Deal-by-Deal Model LPA and Term Sheet are available on the ILPA website here.

Whole of Fund Model LPA and Term Sheet

ILPA has also made a number of updates to its Whole of Fund Model LPA and published a related Term Sheet. A summary of the changes made to the Model LPA has been made available by. ILPA here and, broadly, relate to transparency, governance and alignment of interest.

Both the Whole of Fund Model LPA and Term Sheet are available on the ILPA website here.

Follow-on guidance on subscription credit lines

In June 2020, ILPA published follow-on guidance on subscription credit lines to guidance published in 2017 on best practices related to the use of subscription lines of credit, intended to foster clearer and more informed dialogue between limited and general partners. The follow-on guidance has been published in response to the growth of utilisation of subscription credit lines since the original publication. ILPA states that this growth has made limited partner's ability to measure and assess both exposure and performance at the fund level and for their private equity programmes significantly more difficult. ILPA also states that both general partners and limited partners indicate that the means for providing this transparency varies widely, and related disclosures are not being systematically provided to limited partners.

The follow-on guidance regarding subscription lines of credit disclosures is intended as a follow-on to the 2017 guidance; both sets of guidance should be read in tandem. ILPA states that the aim of this subsequent guidance is to lay out more specifically the incremental disclosures that will aid limited partners and general partners in gaining clarity around the impact of subscription lines, particularly with respect to an limited partner's cash flow modelling and commitment pacing, as well as the performance impacts posed by subscription lines.

Non-Disclosure Agreement

In January 2021, ILPA published a model Non-Disclosure Agreement ("NDA"). ILPA hopes that the model NDA will reduce the time-consuming process of negotiating NDAs for both general partners and limited partners.

The Companies (Shareholders' Rights to Voting Confirmations) Regulations 2020

What is this?

New requirement that, where a vote is cast on a poll by electronic means, the fund must ensure that confirmation of receipt of the vote is sent.

Who does this apply to?

Traded companies, which includes funds listed on the Main Market and Specialist Funds Segment, but not those listed on AIM.

When does this apply?


In July 2020, the Companies (Shareholders' Rights to Voting Confirmations) Regulations 2020 were published. The regulations transpose into UK law certain provisions of the Shareholder Rights Directive (as amended by the Shareholder Rights Directive II).

The regulations insert the following provisions into the Companies Act 2006:

  • an obligation on a traded company to provide a confirmation of receipt of those votes which are cast on a poll electronically; and

  • the right for a shareholder to request information from the company to enable them to determine that their vote has been validly recorded and counted.

The regulations apply to "traded companies" as defined in section 360C of the Companies Act 2006, being those admitted to trading on a regulated market, which includes the Main Market and the Specialist Funds Segment, but not AIM.

The regulations require that where a vote is cast on a poll by electronic means, the company must ensure that, as soon as reasonably practicable after the vote has been received, confirmation of receipt of the vote is sent. This includes any vote cast at a meeting, at an electronic meeting and in advance of a meeting or electronic meeting. The regulations also give shareholders the right to request information from the company to enable them to determine that their vote on a resolution at a general meeting where a poll has been taken has been validly recorded and counted. This must be requested by the shareholder and provided by the company within certain timeframes

The regulations came into force on 3 September 2020.

European Commission launches public consultation on the ELTIF review, following inception impact assessment

What is this?

Review of the EU ELTIF Regulation.

Who does this apply to?

Fund managers.

When does this apply?


In September 2020, the European Commission launched a webpage on the review of the EU rules on long-term investment funds ("ELTIFs") and published an inception impact assessment.

A review of the ELTIF framework is mandated by Article 37 of the ELTIF Regulation. The inception impact assessment launched the review into how well ELTIF is working. Since the ELTIF Regulation came into force, only around 28 ELTIFs have been established, with a very low asset base (below 2 billion euros).

Following the inception impact assessment, in October 2020, the European Commission launched a consultation of the ELTIF framework. The consultation is in the form of two surveys; a short survey asking general questions, and a longer one requesting detailed responses and numerical figures. The surveys request stakeholder feedback in several areas including why the take up of ELTIFs has been so low to date, the possibility of broadening the investment scope, broadening the retail investor base that can invest in ELTIFs and reforming the suitability process while maintaining investor protections, reviewing the mandatory redemption terms, whether to change the borrowing/leverage levels permitted or have separate levels for professional only ELTIFs, and the marketing of ELTIFs.

The consultation ended on 19 January 2021.

Reforms to Irish investment limited partnerships regime

What is this?

Modifications to the Irish legislation relating to limited partnerships.

Who does this apply to?

Irish investment limited partnerships.

When does this apply?

Legislation is due to come into force imminently.

In December 2020, the Irish Government introduced legislation to modernise the rules governing Irish private equity funds. Amendments will be made to the Investment Limited Partnership Act 1994, to make the investment limited partnerships ("ILPs") more attractive for private equity, venture capital and real assets investment strategies in Europe. The aim of the amendments is to make the vehicle 'fit for purpose' compared to similar vehicles in other jurisdictions.

The key changes include; (1) expanding the list of protected activities that a LP may undertake without prejudicing its limited liability status, for example permitting LPs to serve on an advisory committee or board of an ILP or to appoint a representative to serve on any such committee or board without such activity constituting involvement in the management of the ILP; (ii) clarifying the circumstances in which LPs are permitted to withdraw capital from an ILP, including removal of the 4 month clawback period which applied previously in cases where the GP had not certified that the ILP was capable of paying its debts in full as they fell due; and (iii) updating the registration and record keeping requirements for ILPs, in particular clarifying the list of parties entitled to inspect the registers of an ILP.

In anticipation of the new regime, the Central Bank of Ireland issued an updated AIFMD Q&A which removes one of the main issues with regard to the establishment of private funds in Ireland which was the previous requirement that a general partner of an Irish limited partnership itself be approved as an AIF management company and maintain €125,000 minimum regulatory capital. The change represents a significant enhancement of Ireland’s limited partnership regime.

Prohibition on Bearer Certificates introduced for collective investment schemes

What is this?

Prohibition on the issuance, creation and/or cancellation of bearer units in a collective investment scheme.

Who does this apply to?

UK operators of collective investment schemes.

When does this apply?


In November 2020, the Bearer Certificates (Collective Investment Schemes) Regulations 2020 (the "Regulations") were made and came into force on 1 January 2021.

The Regulations amend the Financial Services and Markets Act 2000 to prohibit "bearer units" for all collective investment schemes based in the UK. Bearer units for these purposes means units where the title is evidenced by a certificate or any other documentary evidence of title transferable by delivery and not through a register entry. The prohibition is being introduced as it is required under international standards on anti-money laundering and tax transparency. Bearer certificates are already prohibited for most businesses in the UK but, due to a technical loophole, two types of collective investment scheme registered in the UK had maintained the power to issue bearer certificates: open-ended investment companies incorporated before 26 June 2017 and unauthorised unit trusts. The Regulations were introduced to remedy this.

The Regulations also include transitional provisions for converting or cancelling pre-existing bearer certificates within a year of the Regulations coming into force, the payment of dividends or other distributions during that year and giving notice to those who hold bearer certificates.

From 1 January 2021, all newly-issued shares or units must be in registered form, whether certificated or uncertificated, and their ownership registered.

EU Prospectus Regulation: revised ESMA Guidelines on disclosure requirements

What is this?

Revised disclosure guidelines following the introduction of the EU Prospectus Regulation.

Who does this apply to?

Offers to the public and applications for trading within the scope of the EU Prospectus Regulation.

When does this apply?

During 2021.

In July 2020, ESMA published a Final Report on disclosure guidelines under the Prospectus Regulation. The revised Guidelines were previously referred to as the "CESR Recommendations" (CESR being the predecessor of ESMA) and their aim is to provide market participants with a consistent understanding of the relevant disclosures required in the various annexes to the Commission Delegated Regulation on the format, content, scrutiny and approval of the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market.

The Guidelines are set out in Annex III to the Final Report. ESMA took the opportunity to convert the majority of the recommendations into Guidelines when updating them so that the comply-or-explain mechanism would apply. The Guidelines cover a variety of financial and non-financial topics including:

  • pro forma information;
  • working capital statements;
  • capitalisation and indebtedness;
  • profit forecasts and estimates;
  • historical financial information;
  • operating and financial review;
  • options agreements; and
  • collective investment undertakings.

The Guidelines broadly replicate the content of the CESR recommendations, but with some changes made to drafting for clarity. However, there are a limited number of new Guidelines included, and ESMA specifically draws attention to changes made to profit forecasts, pro forma financial information, working capital statements, and capitalisation and indebtedness statements. In particular, the Guidelines clarify ESMA's expectations on working capital statements and pro forma information. The final Guidelines will become effective two months after being published on ESMA's website. In its Primary Market Bulletin 31, the FCA stated that, since the guidelines were not published in all the official languages by 1 November 2020, they did not become effective before the end of the post-Brexit implementation period on 31 December 2020. This means that for prospectuses approved in the UK, issuers and their advisors should continue to have regard to the ESMA CESR recommendations.

New requirement for share rights to be disclosed on the NSM

What is this?

New requirement to have a summary of the rights attaching to shares published on the National Storage mechanism.

Who does this apply to?

All listed companies.

When does this apply?


In April 2020, a new Listing Rules continuing obligations requirement came into force which requires all listed companies to have published on the National Storage mechanism ("NSM") a summary of the rights attaching to their shares. Accordingly, one of the following should be uploaded to the NSM:

  • the approved prospectus for its listed shares;

  • the relevant agreement or document setting out the terms and conditions on which its listed shares were issued; or

  • a document describing: (i) the rights attached to its listed shares; (ii) limitations on such rights; and (iii) the procedure for exercise of such rights.

The information must be kept up to date. Many listed investment companies will already have a prospectus available on the NSM, which will fulfil the requirements. If, however, the articles of association have been subsequently amended, either a document meeting the criteria above, or the articles of association itself, should be filed.

HMT launch the Future Regulatory Framework Review consultation

What is this?

Consultation on the UK's post-Brexit regulatory framework.

Who does this apply to?


When does this apply?

Not known.

HM Treasury have published the Future Regulatory Framework ("FRF") Review: Consultation. The consultation is the second phase of the FRF Review, which considers how the regulatory framework for financial services needs to adapt to be fit for the future, in particular to reflect the UK's new position outside of the EU.

The key aim of the FRF Review is to achieve an agile and coherent approach to financial services regulation in the UK, with appropriate democratic policy input to support a stable, innovative and world leading financial services sector. Phase 1 of the review focused on improving the effective coordination of regulatory activity in the UK (between regulators and firms), and sought input on how this is currently operating and how they can work together to coordinate their activities to ensure the best outcome for the financial services sector, consumers of financial services, and the UK as a whole.

Phase 2 will be conducted in two stages, starting with this consultation which sets out an overall blueprint for financial services regulation, focusing on the split of responsibilities between Parliament, the government and the financial services regulators. In doing so, it highlights the importance of ensuring appropriate and effective arrangements for accountability, scrutiny and public engagement with the policy-making process, particularly in relation to the UK’s financial services regulators.

The consultation will close on 19 January 2021. The government will use the responses to inform a second consultation in 2021, which will set out a final package of proposals and how they will be delivered. The consultation provides an opportunity for the funds industry to shape the post-Brexit regulation of funds.

Developments in relation to the VAT exemption for fund management

What is this?

Developments in the scope of the VAT exemption for fund management around (1) the definition of what constitutes "management" and (2) the range of funds in scope.

Who does this apply to?

Fund managers and their clients.

When does this apply?


Under the EU's VAT Directive, the VAT exemption for fund management has two elements:

  • the relevant activities must constitute "management"; and
  • such management must be of a "special investment fund" (SIF).


The meaning of management is not defined in the VAT Directive and has been developed through the case law of the Court Justice of the European Union (CJEU). In the case of Blackrock Investment Management (UK) Ltd v Commissioners for Her Majesty’s Revenue & Customs (C-231/19), Blackrock had been arguing that a supply of a management platform that had been used for both SIFs and non-SIFs should be treated as within the exemption insofar as the supply related to SIFs. In July, the CJEU disagreed. There is concern that, in its decision, the CJEU may have indicated that, for a service to constitute “management”, it must be of a type that can only be made to SIFs. This would narrow the scope of the exemption a great deal, as most management services can be provided to all types of fund (e.g. investment advice). Our view is that the exemption should not be interpreted in that way, but the position is not free from doubt.

What this means for asset managers

Where supplies of potential “management” services are made to SIFs and non-SIFs, the parties should consider the arrangements and the extent to which they can legally and economically separate the services relating to SIFs from those relating to non-SIFs (e.g. through separate contractual and billing arrangements). Such an approach will not help address the concern raised by the case that the exemption is limited to services that can only be made to SIFs. On that point, asset managers will want to see how the industry reacts to the decision, whether the CJEU takes a similar approach to Blackrock in the upcoming fund management exemption case of DBKAG and what emerges in relation to the issue from the expected Government review of the VAT treatment of fund management fees (discussed in more detail here).

Special investment fund (SIF)

In April, the UK legislation implementing the fund management exemption into UK law was amended. Under the amendments the relevant statutory provisions were expanded to cover a wider range of entities so as to bring the exemption into line with the EU law definition of SIF. Prior to then, HMRC had operated an informal practice of allowing fund managers to use either the (narrower) UK statutory definition or the (wider) EU law definition. This gave managers of funds that fell within the EU law definition but not the UK statutory one, the choice of whether to treat their supplies as exempt or taxable.

Under the changes:

  • the "closed-ended collective investment undertaking" UK statutory category of SIF was widened by removing the words "wholly or mainly in securities" from the end of one of the requirements i.e. the requirement that the undertaking's sole object is to invest capital, raised from the public wholly or mainly in securities; and

  • a new UK statutory category of SIF was introduced which, broadly speaking, applies to defined contribution pension schemes established in the UK or EU. It should be noted that this new category has itself now been amended with effect from 1 January so that it no longer applies to schemes established in the EU. This restriction of the exemption should generally allow managers to recover their own input VAT on supplies of fund management services to EU established funds but to treat those supplies as outside the scope of UK VAT. This will be particularly welcome where the relevant member state in which the pension fund is established does not charge VAT on the supply under domestic "reverse charge" rules.
Company residence and permanent establishment in light of Covid-19 travel restrictions

What is this?

Difficulties, caused by Covid-19 travel restrictions, in ensuring that a company maintains its residence solely in the desired jurisdiction and does not have unwanted (taxable) permanent establishments.

Who does this apply to?

Companies with directors and employees working outside the relevant company's jurisdiction of tax residence, due to Covid-19 travel restrictions. 

When does this apply?


Travel restrictions caused by the Covid-19 pandemic have led to difficulties for directors, who are not tax resident in the same jurisdiction as their company, physically attending board meetings in the company’s jurisdiction. If such directors attend remotely or, in the absence of board meetings, make important decisions where they are located, there is a risk that the company could be considered resident where the relevant directors are located. Similarly, where travel restrictions lead to directors and employees who normally work in one jurisdiction having, instead, to work in another, this can give rise to concerns that the presence of the individual gives rise to a taxable permanent establishment of the company in that other jurisdiction.

Although some jurisdictions have given express comfort that presence in a state caused by Covid-19 travel restrictions will be disregarded for corporate tax purposes, others (including the UK) have, in effect, taken the view that the normal rules should apply but that, in practice, it is likely to be possible to get comfortable that the temporary presence of individuals in the “wrong” jurisdiction should not, under those rules, cause residency or permanent establishment concerns.

As the “temporary” travel restrictions become longer term, it may become increasingly difficult for companies to get comfortable on these issues.

Post-Covid 19, workers may want to remain in their home jurisdictions, in that case companies will not be able to rely on any Covid-19 related comfort given by jurisdictions.

Those in the funds sector should monitor the situation carefully and consider taking appropriate steps. This may include, for example, appointing new directors resident in company’s intended jurisdiction of residence and providing directors and employees with clear policies of what actions they can take and decisions they can make from their home jurisdictions without generating corporate residence or permanent establishment concerns.

EU member states being obliged to apply most of the hybrids measures in ATAD II (the anti-tax avoidance directive) from 1 January 2020

What is this?

EU member states being obliged to apply most of the hybrids measures in ATAD II (the anti-tax avoidance directive) from 1 January 2020.

Who does this apply to?

Companies within EU member states and counterparties to transactions with them.

When does this apply?

Member states became obliged to apply most of the measures from 1 January 2020.

The EU's Anti-Tax Avoidance Directive (ATAD I) was amended in May 2017. This amendment (ATAD II) extended the scope of the directive so that it applies to more hybrid structures. Member states became obliged to apply most of the measures from 1 January 2020.  If they have not done so already, those in the funds sector should be reviewing their structures to assess the impact of these rules on them.

DAC 6 – restriction of scope and intended repeal of UK rules

What is this?

The UK has recently enacted rules which mean that DAC 6 reporting will only be implemented in the UK in a very limited way, with the intention being that even that is replaced by the UK's implementation of the OECD's mandatory disclosure rules.

Who does this apply to?

Those entering into cross-border arrangements.

When does this apply?

Now. The first UK reports are due shortly.

EU directive 2018/822 (DAC 6) introduces a new tax reporting regime in the UK which came into force on 1 July 2020. Under the original timeline, the first reports were due to be made last summer (2020). However, due to the Covid-19 pandemic the deadlines for the first reports were pushed back in the UK and most (but not all) EU member states.

The EU rules catch “cross-border” transactions which satisfy certain “hallmarks”. The rules aim to ensure that tax authorities across the EU receive information about matters which may involve tax planning at an early stage, to enable swift challenges or changes to the law to counteract aggressive planning. The hallmarks are, however, widely drafted and are likely to capture certain transactions which do not have a tax avoidance motive, and, so, will need to be carefully considered in all transactions with a “cross-border” element.

However, on 30 December last year, regulations were laid before the House of Commons which have significantly restricted the scope of the regime in the UK. In particular, most of the categories of hallmarks that are reportable under the EU rules are now not reportable under the UK regime. Reporting under DAC 6 will still be required by UK intermediaries and taxpayers, but only for arrangements which trigger the category D Hallmarks (broadly, arrangements which obscure beneficial ownership or which thwart effective reporting under the Common Reporting Standard). The changes will apply retrospectively so that historic transactions that would otherwise have been reportable as a result of containing one of the other hallmarks will not now need to be reported. Further, over the coming year, the UK Government intends to repeal the legislation implementing DAC 6 in its entirety and implement the OECD's mandatory disclosure rules instead.

Given the cross-border nature of many fund and asset management structures, it is likely that many arrangements with a UK element will still remain reportable, albeit under the DAC 6 rules of another jurisdiction rather than domestic UK law. 

To the extent this has not been done already, relevant taxpayers and intermediaries should put processes in place to identify and report relevant transactions and communicate these internally. If this has already been done, then these processes should be reviewed in light of the change to the UK rules.

When dealing with third parties, consideration should be given to what (if any) DAC 6 related arrangements may be appropriate (e.g. in relation to co-ordinating reporting) and care taken that suitable provisions are included in the relevant documentation.

Covid-19 travel restrictions - tax issues for individuals

What is this?

Concerns that individuals will become tax resident in jurisdictions where they are "temporarily" located due to Covid-19.

Who does this apply to?

Individuals "temporarily" located in jurisdictions due to Covid-19 and their employers.

When does this apply?


The increasing length of time for which many travel restrictions have been in place due to Covid-19 is generating various tax concerns for individuals and their employers, including that employees will become tax resident in the country in which they are “temporarily” located (e.g. if they have stayed with family during the pandemic, the country in which their family is located). Residence tests in many jurisdictions are linked to time spent in those jurisdictions. Some jurisdictions (including the UK) have introduced relaxations to their usual rules but these relaxations may be time limited.

Those in the funds sector should review the position of their team members and consider the extent to which their working arrangements could trigger tax obligations in the jurisdictions in which the individuals are located. Contractual provisions should also be reviewed to establish who bears the cost of any increased tax burden.

Further development of, and delay to reaching an agreed position on, the OECD's BEPS Pillar One and Pillar Two proposals

What is this?

The development of the OECD's Pillar One and Pillar Two tax proposals and the pushing back of the timeline for reaching agreement on them.

Who does this apply to?

This is still being discussed, but likely to be large multinational enterprise groups.

When does this apply?

The aim is to reach a consensus by the middle of the year but any rules are unlikely to be implemented for at least two or three further years.

Building on its original BEPS project, the OECD is working on two proposals that could have huge consequences for international taxation.

“Pillar One” seeks to introduce a new taxing right for countries in relation to non-resident companies that do not have a permanent establishment there and “Pillar Two” seeks to introduce a global minimum tax rate.

It had been intended that a consensus would have been reached in relation to both pillars by the end of 2020. However, in October the OECD published blueprints for both pillars in which it set out the revised timetable of reaching consensus by mid-2021.

Pillar One is aimed at “consumer” facing businesses and those providing automated digital services.

The Pillar One blueprint indicates that the OECD's current thinking is that there will be an exemption for financial services and that this would include investment funds and their managers. The blueprint for Pillar Two envisages there being an exemption for investment funds (but not fund managers). As the proposals are by no means finalised, those in the funds sector will want to monitor their progress during the course of 2021.

Even if consensus is reached by mid-2021, the timetable for implementation is unclear and we would expect it to take at least two to three further years for reforms as fundamental as those being considered to be implemented internationally.

Non-resident corporate landlords becoming liable to corporation tax (rather than income tax) from 6 April 2020

What is this?

Non-resident corporate landlords have been liable to corporation tax (rather than income tax) since 6 April 2020.

Who does this apply to?

Non-resident corporate landlords.

When does this apply?


Prior to 6 April 2020, non-resident corporate landlords were liable to income tax – not corporation tax – on UK property income profits. However, from that date these profits became subject to corporation tax, with different rates, computational rules and payment and filing requirements.

For an earlier briefing on this topic please click here.


Return to Funds Annual Briefing 2021.

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