Tuesday, April 28, 2009

UK to Change Taxation of Funds

In his recently delivered 2009 Budget, UK Chancellor Alistair Darling outlined the Government's intention to enable UK Authorised Investment Funds ("AIFs") that meet certain conditions to elect into a newly established "tax elected fund" ("TEF") regime. This measure will permit a fund to have a transparent tax status and ensure that AIF taxation takes place at the investor level only, so that investors will be treated as though they had invested directly in the fund's underlying assets. TEFs will be required to divide their distributions into two types, dividend and interest distributions. UK dividend income will remain exempt in the TEF and will be distributed as a dividend, while interest distributions made from all other categories of income will entitle the TEF to receive a tax deduction up to the same amount. The new regime will take effect on September 1, 2009.

Under current rules, AIFs are generally charged a corporate income tax at a special rate of 20 percent, making them less attractive for tax-exempt investors, such as pension funds, charities and individual savings account investors. The Government believes the new regime will enhance the UK's competitiveness in the international market for asset management compared with other leading jurisdictions, such as Luxembourg, Ireland and the Cayman Islands.

Draft regulations introducing the new regime are expected to be published shortly.