Tax Talks

The Proskauer Tax Blog

BlueCrest FTT Decision –  Salaried Member Rules and Asset Managers

The recent decision of the First-tier Tribunal (FTT) in BlueCrest Capital Management (UK) LLP v HMRC (29 June 2022) is the first time the UK’s salaried member rules (the Rules) have been considered in the context of an asset management limited liability partnership (LLP). BlueCrest is engaged in providing hedge fund investment management services. In summary, the FTT found that certain of BlueCrest’s members who were responsible for managing significant investment portfolios had ‘significant influence’ over the affairs of the LLP, irrespective of whether that influence on a financial level amounted to managerial influence over the whole of the LLP’s affairs, such that those members were not salaried members (but that other members who were not engaged in portfolio management did not have significant influence for these purposes, as explained below).

 The decision in respect of the significant influence condition for portfolio managers will be welcomed by asset management LLPs. However, it is generally expected that HMRC will appeal the decision, particularly given that it appears to be at odds with HMRC’s approach, as set out in the HMRC Partnership Manual, that only members involved in the top level management of an LLP should treated as having significant influence over its affairs. Continue Reading

The Biden Administration Proposes Changes to the Taxation of Partnerships

On March 28, 2022, the Biden Administration proposed certain limited changes to the taxation of partnerships. In short, the Administration’s proposals would (i) prevent related partners in a partnership that has made a section 754 election from basis shifting to reduce taxable income;[1] and (ii) make two helpful changes to the partnership audit rules.

I. Prevent Basis Shifting by Related Partners

Under current law, if a partnership with appreciated non-depreciable assets and depreciable or amortizable assets makes a “section 754 election” and distributes the appreciated non-depreciable assets on a tax-free basis to one partner, the other partners are entitled to “step-up”, or increase, their basis in the depreciable or amortizable assets. This allows them to claim increased depreciation or amortization deductions or generate losses from assets to be sold.  These transactions are known as “basis bumps”. Continue Reading

HMRC Clarifies Application of QAHC Regime to Corporate Lending Vehicles

HMRC has recently updated the guidance relating to the UK’s new qualifying asset holding company (QAHC) tax regime which was introduced from 1 April 2022. The new guidance clarifies HMRC’s approach to whether corporate lending vehicles used by credit funds should be treated as carrying on an investment activity or a trade in the context of the requirement for a QAHC to carry out investment activity with any trading activity being purely ancillary to it, which is considered further below.

The QAHC regime was introduced with a view to increasing the UK’s competitiveness as a jurisdiction for asset management. Broadly, the regime aims to provide a tax neutral holding (or, in the context of credit funds, lending) company structure where the relevant conditions are satisfied. The key benefits of the regime include:

  •  Exemption from withholding tax for all interest payments made by a QAHC;
  • Deduction for interest arising on profit-participating (or “results dependent”) loans and certain other “special securities” in respect of which interest payments would otherwise be treated as non-deductible distributions;
  • Exemption from tax on capital gains realised on the disposal of shares in UK or non-UK companies (provided such companies are not UK-property rich) and non-UK real estate;
  • Exemption from stamp duty and SDRT on repurchase of own shares or loan capital;
  • Payments by a QAHC on redemption, repayment or purchase of its own shares are not treated as distributions (other than for portfolio company level management); and
  • The remittance basis of taxation may be available to fund managers on income and gains from foreign assets held through a QAHC (subject to the special remittance basis rules applicable to carried interest).

The regime is available to UK tax resident companies where at least 70% of the owners are so-called “Category A” investors. Category A investors include certain qualifying funds, QAHCs themselves, certain specified types of investor (including those benefiting from sovereign immunity, pension schemes, charities and authorised persons carrying on long term insurance business), public authorities and certain non-UK companies wholly owned by one or more Category A investors which are not QAHCs.

At a high level, the other conditions for the availability of the regime are:

  1. the company’s main activity is carrying on an investment business and any other activities are ancillary to that business and are not substantial;
  2. its investment strategy does not involve the acquisition of listed securities; and
  3. none of its shares are listed or traded on a recognised stock exchange.

To read more about the details of the QAHC regime and qualifying conditions, please read our submission to the 2021 PIF Annual Review and Outlook here.

So, where a company is engaged in any trading activity, the regime will not be available unless the trade is merely ancillary to the main investment business and is not substantial. Following the introduction of the regime there was some uncertainty among asset managers as to whether credit funds which engage in loan origination (or other activities related to debt) might be considered to be carrying on trading activity and/or whether any fees they received in connection with their main lending activities (such as arrangement fees, facility fees and syndication fees) might be considered to be trading income. If either the basic activity were considered trading or the fees were treated as trading income which was more than insubstantial in the context of the company’s activities as a whole the regime would be unavailable. Depending on the characterisation of standard loan origination activities, this could mean that a significant number of credit funds could not use the regime and this would have had the effect of undermining the policy objectives of the regime in the context of such funds.

Following discussion with industry stakeholders HMRC has updated the relevant section of its published QAHC guidance in the context of credit funds. In summary, the guidance now confirms that loan origination is not in itself indicative of a trade and that, where loans are originated with the intention of being held on a medium to long term basis as part of the QAHC’s investment strategy, it is likely that this will be part of its (main) investment business. With regard to fees, the guidance states that fees that are just a part of originating loans, such as arrangement fees, are likely to be investment income and simply part of that main investment business if the lending itself is an investment activity. However, fees received for arranging loans for others, such as syndication fees, might well be trading income arising from a separate business activity to any investment business that the company might also carry on. The guidance indicates that the best test of whether the syndication fees are ancillary and insubstantial might be the value of those fees relative to the investment returns received by the company.

Similarly, with regard to the acquisition of distressed debt, the updated guidance provides that, where such assets are acquired with the intention of being held for the medium to long term, this is likely to constitute investment activity, even where the assets are disposed of prior to termination of the loan on an opportunistic basis. Conversely, greater levels of activity in relation to distressed assets such as leading a restructuring or insolvency process (and generating fees from such activities) may be indicative of a trade. However, this is a question of fact to be assessed on a case by case basis.

This updated guidance provides a welcome clarification of HMRC’s interpretation of how the QAHC legislation should apply to lending/debt acquisition companies set up by credit funds which should provide a high measure of comfort to asset managers in the credit sphere who are considering using QAHCs within their fund structures. The guidance also provides insight on HMRC’s view as to whether particular loan related activities constitute trading or investment activities as a general matter and, as such, may be more widely useful for credit funds that do not envisage the use of QAHCs within their structures.

For further information on the QAHC regime, please contact a member of the Proskauer London Tax team.

EU Commission publishes draft directive to remove tax driven debt-equity bias

Summary and Background

On 11 May 2022, the European Commission (the “Commission”) published its draft proposal for a debt-equity bias reduction allowance (“DEBRA” or, the “Directive”), which forms part of the Commission’s Communication on Business Taxation reforms which were first outlined on 18 May 2021.  The Directive seeks to remove tax as a weighted factor in the choice of funding for companies and encourage the use of equity investments.  The perceived view of the Commission is that debt is usually favoured over equity due to the fact that most tax systems allow for the deduction of interest on debt, while costs relating to equity financing are usually non-tax deductible. Continue Reading

The Biden Administration Re-Proposes to Tax Carried Interests as Ordinary Income

On March 28, 2022, the Biden Administration proposed to tax “profits” or “carried” interests as ordinary income and impose self-employment tax on income and gains from these interests for certain partners in investment partnerships. The proposal is identical to the proposal made by the Administration last year.

Under current law, a “carried” or “profits” interest in a partnership received in exchange for services is generally not taxable when received and the recipient is taxed on their share of partnership income based on the character of the income at the partnership level. Section 1061 requires certain carried interest holders to satisfy a three-year holding period – rather than the normal one-year holding period – to be eligible for the long-term capital gain rate. Continue Reading

A New(ish) Chemical Excise Tax Effective July 2022

After a more than 26 year hiatus, on July 1, 2022, the Superfund chemical excise tax (the “Superfund Chemical Tax”) will again become effective. This excise tax, reinstated by the passage of the Infrastructure Investment and Jobs Act,[1] is imposed on manufacturers, producers, and importers of certain chemicals and chemical substances. As discussed below, the re-establishment of this tax may have significant financial, administrative, and operational impacts; thus, it is crucial that businesses potentially subject to this tax understand its applicability, obligations, and exceptions, for tax year 2022 and beyond.

Even for those who have dealt with the first iteration of this tax, there are many material differences in the resurrected tax regime, including the applicable tax rates on chemicals and the threshold for determining which chemical substances are taxable.

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The Biden Administration Proposes Changes to the Taxation of Real Property

On March 28, 2022, the Biden Administration proposed changes to the taxation of real property.

Restrict Deferral of Gain for Like-Kind Exchanges under Section 1031

The Biden Administration has proposed to limit the gain that can be deferred under a like-kind exchange of real estate under section 1031 to $500,000/year for individual taxpayers (or $1 million/year for married individuals filing jointly).[1] Taxpayers will be required to recognize gain in excess of the $500,000/$1 million threshold in the year the real property is exchanged.  The proposal does not apply to real estate investment trusts (“REITs”) or C corporations, and therefore it appears that individuals are unrestricted in their ability to benefit from like-kind exchanges through these entities.

If the proposal is enacted, one would expect to see increased use of Up-REITs, “mixing bowls”, and long-term net leases.  These arrangements all allow tax-deferral while reducing a taxpayer’s economic risk in the underlying real estate.  An Up-REIT is a structure under which a REIT owns a partnership that holds real property.  Investors contribute appreciated property to the partnership in a tax-free exchange for a partnership interest and the ability to exchange the partnership interest for an interest in the REIT. Up-REITs allow deferral, diversification, and (for publicly-traded REITs) liquidity. In a mixing bowl transaction, a taxpayer contributes appreciated real estate to a partnership and, after a specified period of time (typically seven years), the real estate is distributed to another partner and the contributing partner retains an economic interest in the partnership’s other assets.  In a long-term lease, the taxpayer locks-in a fixed economic return over a long-term period.  These transactions would not be affected by the Biden Administration proposal.

Treat 100% of Depreciation Recapture on the Sale of Section 1250 Property as Ordinary Income

The Biden Administration has proposed to treat all gain on section 1250 property held for more than a year as ordinary income to the extent of cumulative depreciation deductions taken after December 31, 2022. Depreciation deductions taken on section 1250 property prior to December 31, 2022 would continue to be subject to current rules (and subject to recapture only to the extent the depreciation exceeds the amount that would be allowable under a straight-line method). Any gain on the sale of section 1250 property in excess of depreciation recapture would continue to be treated as section 1231 gain. Any unrecaptured gain on section 1250 property would continue to be taxable to noncorporate taxpayers at a maximum 25% rate.

Under current law, section 1250 requires a certain amount of the gain from the sale or disposition of certain depreciable real property used in a trade or business to be “recaptured”, or recharacterized as ordinary income, to the extent of prior depreciation deductions taken on that property.[2] For property held for one year or less, the amount of gain recaptured is all prior depreciation deductions. For property held for more than one year, the amount of gain recaptured is the amount of depreciation that exceeds the amount that would have been allowable under a straight-line method. Accordingly, only gain attributed to deductions equal to the difference between those taken under an accelerated depreciation method or bonus depreciation and those allowable under a straight-line method is recaptured and taxed at ordinary rates. This would be changed under the Biden Administration proposal.  For noncorporate taxpayers, gain that is attributable to straight-line depreciation, or “unrecaptured 1250 gain,” is taxed at a maximum rate of 25%. This rule would remain under the Biden Administration proposal.

In addition, under section 1231, noncorporate taxpayers treat section 1231 losses as ordinary losses and section 1231 gain as long-term capital gain. This rule would remain under the Biden Administration proposal.

The Biden Administration proposal would not apply to noncorporate taxpayers with an adjusted taxable income below $400,000 (or $200,000 for married individuals filing separately).  These income amounts would be calculated before applying the proposed 100% depreciation recapture on section 1250 property.

Under the Biden Administration proposal, flow-through entities would be required to compute the character of gains and losses on the sale or disposition of section 1250 property and report to the entity owners the amounts of ordinary income or loss, capital gain or loss, and unrecaptured section 1250 gain under both existing and proposed rules. Owners with income of at least the $400,000/$200,000 threshold amount would report tax items calculated under the proposed rules.

The proposal would be effective for depreciation deductions taken on section 1250 property in taxable years beginning after December 31, 2022, and sales or dispositions of section 1250 property completed in taxable years beginning after December 31, 2022.


[1] All references to sections are to the Internal Revenue Code or the Treasury regulations.

[2] For this purpose, “sale or disposition” includes sale, exchange, involuntary conversion, transfer by corporation to shareholder, transfer in a sale-leaseback transaction, and transfer upon foreclosure of a security interest. Treasury regulations section 1.1250-1(a)(4).

The Biden Administration Proposes Changes to the Taxation of Cryptocurrency Transactions

On March 28, 2022, the Biden Administration proposed certain very limited changes to the taxation of cryptocurrency transactions. The proposals do not change the current treatment of cryptocurrency as property for federal income tax purposes, and do not address any of the fundamental tax issues that cryptocurrency raise.

I. Apply Securities Loan Rules to Digital Assets

Under current law, securities loans that satisfy certain requirements are tax-free under section 1058.[1] The Biden Administration’s proposal would expand section 1058 to apply to “actively traded digital assets” recorded on cryptographically secured distributed ledgers, so long as the loan agreement contains similar terms to those currently required for loans of securities. [2] The Secretary would also have the authority to define “actively traded” and extend section 1058 to “non-actively traded” digital assets. In addition, the proposal would require a lender to include in gross income amounts that would have been included had the lender not loaned the digital asset (i.e., “substitute payments”). The proposals would be effective for taxable years beginning after December 31, 2022.

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The Biden Administration Proposes Changes to the U.S. International Tax Rules

Introduction and Summary

On March 28, 2022, the Biden Administration proposed changes to the U.S. international tax rules.

In short, the Biden Administration proposed to:

  • Enact a 15% minimum “undertaxed profits rule” (a “UTPR”) to replace the “Base Erosion Anti-Abuse Tax” (“BEAT”), and a 15% “qualified domestic minimum top-up tax” (a “QDMTT”). These proposals are intended to comply with “Pillar Two” – the “Global Anti-Base Erosion” (“GloBE”) rules – of the “Inclusive Framework on Base Erosion and Profit Shifting” (“BEPS”), agreed to by the OECD/G20 member states on October 8, 2021.[1] Under the UTPR, U.S. corporations that are members of a foreign-parented multinational located in a jurisdiction that has not implemented an “income inclusion rule” (an “IIR”) would be denied deductions as are necessary to ensure that the non-U.S. group pays an effective tax rate based on book (and not taxable) income of at least 15% in each non-U.S. jurisdiction in which the group has profits. An IIR imposes a “top-up tax” on an “ultimate parent entity” (“UPE”) in its jurisdiction to produce a 15% minimum effective rate of book income in each taxing jurisdiction in which a member of the parent’s group does business. GILTI and Subpart F are IIRs.[2]

The QDMTT proposed by the Biden Administration would be a 15% domestic minimum top-up tax that would grant the United States taxing priority over other countries enacting a UTPR. The Biden Administration proposal also indicates that U.S. multinationals will benefit from U.S. tax credits and other tax incentives, despite the fact that the OECD/G20 agreement would treat nonrefundable tax credits (like most U.S. tax credits) as reducing a company’s effective rate of tax and would impose tax or deny deductions if those tax credits reduced the company’s effective rate of tax below 15%.

  • Increase the “Global Intangible Low-Taxed Income” (“GILTI”) rate from 10.5% to 20% in conjunction with an increase in the corporate tax rate from 21% to 28% (which was proposed separately). Consistent with the Biden Administration’s previous proposal, GILTI and Subpart F would be applied on a jurisdiction-by-jurisdiction basis to prevent blending.  Applying GILTI and Subpart F on a jurisdiction-by-jurisdiction basis conforms them to the OECD/G20 agreement.
  • Provide a 10% tax credit for expenses incurred in “onshoring a U.S. trade or business,” which is reducing or eliminating a trade or business (or line of business) currently conducted outside the United States and starting up, expanding, or otherwise moving the same trade or business within the United States, but only to the extent that U.S. jobs result. The proposal would conversely deny deductions for “offshoring a U.S. trade or business,” which is reducing or eliminating a trade or business or line of business currently conducted inside the United States and starting up, expanding, or otherwise moving the same trade or business outside the United States, to the extent that this action results in a loss of U.S. jobs.
  • Authorize the IRS to issue regulations to allow taxpayers to make retroactive “qualified electing fund” (“QEF”) elections for their “passive foreign investment companies” (“PFICs”) without requesting IRS consent, so long as the U.S. government would not be prejudiced.

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The Biden Administration Proposes Mark-to-Market Minimum Tax on Individuals With More than $100 Million in Assets

Summary and Background.  On March 28, 2022, the Biden Administration proposed a 20% minimum tax on individuals who have more than $100 million in assets.  The minimum tax would be based on all economic income (which the proposal refers to as “total income”), including unrealized gain.  The tax would be effective for taxable years beginning after December 31, 2022.  The minimum tax would be fully phased in for taxpayers with assets of $200 million or more.

Under the proposal, an individual’s 2023 minimum tax liability would be payable in nine equal annual installments (e.g., in 2024-2032).  For 2024 and thereafter, the minimum tax liability would be payable in five annual installments.  The tax may be avoided by giving away assets to section 501(c)(3) organizations (including private foundations or donor advised funds) or 501(c)(4) organizations before the effective date of the legislation so as to avoid the $100 million threshold.

The Biden proposal is an attempt to appeal to Senator Joe Manchin (D-W.Va.) and address some criticisms of Senator Ron Wyden’s (D-Or.) mark-to-market proposal.  Senator Manchin has expressed support for a minimum 15% tax on individuals, and this support was apparently an impetus for the proposal.  Senator Manchin has not, however, expressed support for a mark-to-market minimum tax, and the Biden Administration does not appear to have received any support from Senator Manchin before releasing its proposal.

The five-year payment period is an attempt to address concerns that Wyden’s proposal might overtax volatile assets, and to “smooth” taxpayers’ cash flows without the need for the IRS to issue refunds.  Under the Biden Administration’s proposal, installment payments of the minimum tax may be reduced to the extent of unrealized losses.

The minimum tax is being described as a “prepayment” that may be credited against subsequent taxes on realized income.  This description provides a backup argument on constitutionality: the minimum tax isn’t a tax on unrealized income but is merely a prepayment of tax on realized income.

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