NEW YEAR TAX CHECKLIST FOR PRIVATE CAPITAL MANAGERS

Tax Development 

Introduction

What does this mean for private capital managers?

New UK carried interest regime to be introduced from 6 April

The UK is set to introduce, from 6 April 2026, a new regime under which all carried interest is taxed exclusively as trading income. However, “qualifying” carried interest will benefit from the application of a multiplier that will result in only 72.5% of it being within the charge, giving an effective tax rate of around 34.1%.

Carried interest will be "qualifying" to the extent, broadly, that it derives from a fund with a weighted-average holding period (AHP) for its assets of at least 40 months. Helpfully, the regime will improve the current rules which can stretch AHPs to ensure they are measured in a commercially realistic manner (known as "T1/T2" rules).

The UK government has published draft legislation that is unlikely to be substantially amended.

Aside from giving the UK the highest effective rate of carried interest tax amongst mainstream EU jurisdictions, the reforms are likely to generate complex international issues.

Now the rules have are close to finalisation, private capital managers will need to start planning for the change, including considering implications for non-residents, stress testing AHP position and preparing for the new payment on account rules.

For more information, please see our briefing.

Major reform of Luxembourg carried interest tax regime from 2026 tax year

Luxembourg has released a draft bill which, if adopted, would radically reform the tax treatment of carried interest received by Luxembourg resident executives.

The proposals distinguish between:

• contractual carried interest – this is carried interest not paid on (nor inseparably linked to) interests or shares in an alternative investment fund (“AIF”) and will be taxed at a quarter of the regular income tax rate (giving a maximum rate of about 11.45%); and

• participatory carried interest – this is carried interest paid in relation to (or closely linked to) a direct or indirect interest or shareholding in an AIF (including in partnership form) and will be tax exempt provided the interest or shareholding is held for more than six months  and represents less than 10% of the interests in the fund.

A further key change is that the proposals broaden the range of executives who can benefit from the preferential tax treatment beyond the sole employees of the AIFM / management company to include, amongst others, employees and board members of the portfolio manager or investment adviser.

Given its status as a leading fund jurisdiction, Luxembourg's current carried interest tax regime is a surprisingly unclear patchwork of measures. The new regime, if adopted, should increase clarity and improve Luxembourg's competitiveness as a location for fund executives.

It will be key, however, to ensure that carried interest is properly structured to fall in the desired bucket and to mitigate the risk of potential challenges under the abuse of law provisions. 

UK Supreme Court hearing in BlueCrest salaried members case

Under the UK's salaried members rules, a member of an LLP can be treated as an employee rather than self-employed for tax purposes, such that employers' NIC and PAYE obligations arise. Broadly, the regime will not apply if the individual has any of three facets of true partner-like status, including "significant influence" over the LLP.

In January 2025, the Court of Appeal, overturning the decisions of the First-tier Tribunal (FTT) and Upper Tribunal (UT), held that "significant influence" must be construed narrowly. It held that the influence must derive from the legal rights and duties of the members and indicated that the focus should be only on strategic influence which itself should be over all the affairs of the partnership. However, BlueCrest has been granted permission to appeal, and the case is scheduled to be heard by the Supreme Court later this month.

The Court of Appeal decision markedly restricts the scope of significant influence as compared to the lower tribunal's interpretation. Indeed, the need for the influence to be derived from the members' legal rights and duties goes further in narrowing the concept than even HMRC contended.

As we await the Supreme Court's view on the salaried members rules, most firms are adopting a wait and see approach.  An exception to this is those relying solely on "significant influence" to prevent the salaried members rules applying – with many of those revisiting their LLP deeds to ensure that the influence it is properly embedded in the legal rights and duties of the members.

For more information, see our briefing on the Court of Appeal decision.

UK court rulings in LLP member receipts cases expected

Over the last few years, a series of cases have been working their way through the courts in which HMRC have challenged non-trading returns of LLP members – arguing they should be subject to full income tax rates (rather than the (lower) capital gains tax rates or non-taxable).

In these cases, HMRC has had complete success through the invocation of the, previously rarely used, "miscellaneous income" tax charge. A further notable feature of the cases has been that HMRC also argued that various other anti-avoidance provisions were potentially applicable, - to some judicial sympathy.

However, the story may not be over as we expect to soon get the Supreme Court's take on the issue when it hands down its judgment in the case of HFFX and further light may also be shed by upcoming Upper Tribunal judgment in The Boston Consulting Group case.

Executive remuneration has been area of HMRC focus for some time, and this looks set to continue.

HMRC is increasingly looking to apply a wide range of potential charging provisions, including miscellaneous income, and so the upcoming HFFX and The Boston Consulting Group decisions are awaited with interest.

However, given the (fairly aggressive) nature of the particular remuneration scheme involved in HFFX it would be a surprise if the Supreme Court came to a different conclusion to the lower courts and tribunals.

New EU tax information requirement for non-EU managers to market funds in EU from 16 April

A non-EU alternative investment fund manager (AIFM) can market funds in an EU member state under that state's national private placement rules (NPPR).  

However, under an upcoming amendment to the Alternative Investment Fund Managers Directive (AIFMD), to be able make use of a member state's NPPR,  the AIFM's home jurisdiction (and, if the fund is non-EU, the fund's home jurisdiction) must have entered into an exchange of information agreement which fully complies with the standards laid down in Article 26 of the OECD's Model Tax Convention and ensures effective exchange of information in tax matters.

It is common for non-EU fund managers to make use of NPPR regimes (as an EU marketing "passport" will not be available).

From 16 April (when the new rules come into effect), it will be necessary for non-EU AIFMs to check the tax information exchange arrangements in place with member states who NPPRs they wish to use.  

It is currently too early to tell how EU national regulators will interpret the requirement for tax agreements to "fully" comply with Article 26 and to ensure "effective" information exchange. This is something to watch, but it is expected that member states that currently provide an accessible NPPR regime will not look to take an overly restrictive approach.

New US rules for certain foreign government investors 

In December, the IRS issued both final and proposed regulations under Section 892 of the Internal Revenue Code.  That section exempts certain foreign government investors (892 Investors) from US tax but, broadly, does not apply to commercial activity.

Among other provisions, the final regulations finalize and clarify a “qualified partnership interest exception” (previously referred to as the “limited partner exception”), which provides a safe harbour from the attribution of commercial activity for a partnership investment by an 892 Investor that has limited liability, lacks authority to bind or act on behalf of the partnership, does not control the partnership and has no rights to participate in the management and conduct of the partnership’s business. 

Among other provisions, the proposed regulations provide guidance on when the acquisition of debt is treated as investment (and not commercial activity), including two safe harbours (for registered offerings and qualified secondary market acquisitions) and a facts and circumstances test.  It is noteworthy that the proposed regulations view the commercial activity standard for lending activity as broader than that typically applied in the context of determining whether lending activity gives rise to a US trade or business.

These rules are relevant for 892 Investors that invest in the US, as these rules relate to the exemption under Section 892. 

The qualified partnership interest exception provides comfort that many passive investments in investment funds will not constitute a commercial activity. 

The proposed regulations (which aren’t effective until finalized) would provide a potentially broader framework for when debt investments give rise to commercial activity, and 892 Investors may start to take these proposed rules into account when making investments.

Irish dividend withholding tax exemption for Irish investment limited partnerships (ILPs) and equivalent EU funds

Ireland has introduced an exemption from dividend withholding tax for distributions (made on or after 1 January 2026) to ILPs and equivalent EU partnership funds where the distributing entity is a 51% subsidiary of the ILP or equivalent fund.

The application of Irish dividend withholding tax on payments by an Irish company to a partnership has been a barrier to the growth of Ireland as a private equity jurisdiction. The resolution of this issue is anticipated to facilitate the growth of Ireland as a holding company jurisdiction for private assets and the use of ILPs as fund vehicles. It will now be possible to utilise an Irish investment limited partnership and an Irish based holding company for private equity transactions.

Relaxation of Irish anti-reverse hybrid rules

Ireland has, from 2026, relaxed its anti-reverse hybrid rules for partnerships which qualify as collective investment schemes (CISs) by making the diversification requirement (to qualify as such a scheme) easier to satisfy. 

Under the new rules a CIS can now invest up to 20% of their funds in a single issuer (up from 10%) and a look through can apply in cases where a partnership holds investments through a 95% subsidiary.

This change is an effort to simplify rules for investment managers utilising Irish partnership in private assets structures. 

Reform of UK's permanent establishment (PE) definition and investment manager exemption (IME)

The concept of PE is important because having a PE can bring non-resident traders within the UK tax net on their profits (deriving from the establishment).

The UK rules relating to PEs are set to be amended so that, broadly, they are in line with the position set out in the current version of the OECD’s model double tax treaty.  This includes widening the definition of PE itself, thereby potentially making more non-UK residents subject to UK tax.

UK private capital managers typically take care to ensure that they do not constitute a PE of their overseas clients, and, helpfully, the UK rules contain a specific exemption, the IME, designed to prevent that from occurring. In welcome news, as part of the PE reform package, the IME is being updated, with the bulk of the changes designed to make it more accessible for private capital managers.

Although the implementing legislation has not been enacted, when it is, the changes will have effect for chargeable periods beginning on or after 1 January 2026.

The current IME is not always applicable, and so managers often structure their affairs so as to fall outside of the basic PE definition (without having to rely on the IME), for example, by entering into advisory rather than discretionary management arrangements.

However, the upcoming reforms to the PE definition will make it harder for managers to do this, as the definition is to include persons who habitually play the principal role leading to the conclusion of contracts by the non-resident (and not just, as currently, those who actually have signing authority) – potentially encompassing some advisory arrangements. This will make the IME more important, and its expansion is therefore welcome. 

Notably, the Government has not said that it will seek to amend the PE definition in the UK's existing double tax treaties (DTTs). This is typically a narrower definition, in line with the current domestic legislation.  The effect of this is that even though the UK's domestic PE definition is to be widened, taxpayers resident in jurisdictions with existing DTTs are likely to be entitled to relief on their UK trading profits provided they do not have a UK PE within the narrow definition.

For private capital managers with UK operations, the PE and IME reforms will be something to bear in mind at their next fundraise.

Increased German tax authority focus on manager "permanent establishment" (PE) status

The German tax authorities are increasingly arguing that non-German managers and advisors with a link to Germany (such as an office, personnel and/or subsidiaries), constitute German PEs of their non-German fund clients – potentially bringing those clients within the German tax net.

For German tax purposes, a PE includes the place where day-to-day management decisions of some importance are regularly determined. For a fund partnership, this may include the premises of its AIFM. Advisors without decision-making powers may also be in scope if the fund’s management (potentially through the AIFM) continuously monitors their activities at the advisor’s premises, thereby establishing de facto control over those premises. This has been held to be the case, for example, where there is personal identity between the management of the fund/AIFM and the advisor.

The increased scrutiny of German emanations of foreign fund managers and advisors means that tax audits are intensifying, with authorities testing new arguments to assert German PE exposure (sometimes beyond clear statutory support). Unexpected German PE findings can trigger German tax exposure, compliance burdens, and potential double taxation conflicts.

Structures involving German offices, personnel and/or subsidiaries require careful monitoring, contractual clarity, and early tax risk assessment to avoid unwelcome surprises.

Introduction of 10% threshold for German PFIC rules

Holdings in German law PFICs can generate adverse tax consequences, in particular, for German resident investors.

A PFIC is, broadly, a non-German company that (i) derives passive income (in particular, interest income and so-called "free-float dividends") which is not taxed at a rate of at least 15%; and (ii) in which a German investor – directly or indirectly (e.g., through a fund) – holds a “controlling” interest. Previously, even holdings of less than 1% sufficed under certain conditions. In practice, the application of the German PFIC rules was particularly problematic in cases of very small minority holdings. Determining the applicability of the rules requires detailed information which a German investor - often a minority participant - may be unable to obtain. 

To address this issue, a bill was enacted on 22 December 2025 providing that the rules will only apply if a German investor, alone or together with related parties, holds directly or indirectly at least 10% of the shares in the PFIC. The enacted changes apply retroactively to July 2021 with respect to the relevant German PFIC rules amendments.

The introduction of a 10% threshold significantly eases the application of the German PFIC rules, particularly in the context of investments by German investors in AIFs.

However, practical issues remain. Even a 10% German investor in an AIF will typically not be able to influence the AIF's investment decisions, making the continued application of the rules in such cases appear excessive. The persistent lack of access to detailed information further complicates compliance.

Pending historical cases dating back to 2021 should be reviewed for potential amendments in light of the new 10% threshold.

Consultation on reforms to UK qualifying asset holding company regime

The UK government is set to launch a consultation on how to improve the UK's beneficial tax regime for qualifying asset holding companies (QAHCs).

The consultation is not expected to lead to fundamental changes to the regime, rather to result in technical amendments to improve its effectiveness.

The QAHC is a popular holding company vehicle, with hundreds launched since its introduction in 2022.

The consultation is a welcome development, indicating that the government is committed to improving the regime.