The Authorised Investment Funds (Tax) Regulations 2006

PART 1U.K.PRELIMINARY PROVISIONS AND INTERPRETATION

Preliminary provisionsU.K.

Citation, commencement and effectU.K.

1.—(1) These Regulations may be cited as the Authorised Investment Funds (Tax) Regulations 2006, and shall come into force on 1st April 2006.

(2) These Regulations have effect—

(a)for the purposes of income tax—

(i)for the tax year 2006-07 and subsequent tax years, and

(ii)for distributions made on or after 6th April 2006;

(b)for the purposes of corporation tax—

(i)on income, for accounting periods beginning on or after 1st April 2006,

(ii)on chargeable gains, in relation to disposals made on or after 1st April 2006, and

(iii)for distributions made on or after 1st April 2006; and

(c)for the purposes of capital gains tax, in relation to disposals made on or after 6th April 2006.

F1(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Structure of these RegulationsU.K.

2.  The structure of these Regulations is as follows—

• this Part contains preliminary provisions and provides for interpretation;

• [F2Part 1A deals with the genuine diversity of ownership condition;]

• Part 2 deals with the tax treatment of authorised investment funds;

• [F3Part 2A deals with qualified investor schemes]

• [F4Part 2B deals with diversely owned AIFs;]

• Part 3 deals with distributions made by authorised investment funds;

• Part 4 deals with the treatment of participants in authorised investment funds;

• [F5Part 4A deals with Property AIFs;]

• [F6Part 4B deals with Tax Elected Funds;]

• Part 5 deals with compliance;

• Part 6 contains further provisions relating to authorised investment funds;

• [F7Part 6A contains provisions relating to Funds Investing in Non-Reporting Offshore Funds (FINROFs);]

• Part 7 contains consequential amendments and modifications of enactments; and

• Part 8 contains final provisions.

InterpretationU.K.

Definition of “authorised investment funds”U.K.

3.  In these Regulations “authorised investment funds” means—

(a)open-ended investment companies, and

(b)authorised unit trust schemes.

Definition of “open-ended investment company”U.K.

4.  In these Regulations “open-ended investment company” means a company incorporated in the United Kingdom to which section 236 of FISMA 2000 M1 applies.

Interpretation of expressions relating to authorised unit trust schemesU.K.

5.—(1) In these Regulations “unit trust scheme” has the meaning given by section 237 of FISMA 2000.

(2) For the purposes of these Regulations a unit trust scheme is authorised in relation to an accounting period if an order under section 243 of FISMA 2000 is in force in relation to that scheme during the whole or part of that accounting period.

(3) In these Regulations “unit holder” means a person entitled to a share of the investments subject to the trusts of a unit trust scheme.

Further definitions generally relevant for authorised investment fundsU.K.

6.—(1) In these Regulations the “legal owner” means—

(a)in relation to an open-ended investment company, the open-ended investment company, and

(b)in relation to an authorised unit trust, the trustees of the trust.

(2) In these Regulations the “scheme property” means—

(a)in relation to an open-ended investment company, the property subject to the collective investment scheme constituted by the company, and

(b)in relation to an authorised unit trust, the property subject to the collective investment scheme constituted by the trust.

(3) In these Regulations the “manager” means—

(a)in relation to an open-ended investment company, the authorised corporate director, and

(b)in relation to an authorised unit trust, the person who is the manager of the trust for the purposes of Chapter 3 of Part 17 of FISMA 2000 (authorised unit trust schemes).

(4) In these Regulations, unless a contrary intention appears, “units” means the rights or interests (however described) of the participants in the authorised investment fund.

(5) In these Regulations “accumulation unit” means—

(a)in relation to an open-ended investment company, a share in the company in respect of which income is credited periodically to the capital part of the scheme property of the company, and

(b)in relation to an authorised unit trust, a unit in the trust in respect of which income is credited periodically to the capital part of the scheme property of the trust.

(6) In these Regulations a “participant”, in relation to an authorised investment fund, means a beneficial owner of units in the fund, except where the units are held on trust (other than a bare trust) or are comprised in the estate of a deceased person, and in such a case the participant, in relation to the fund, means the trustees of the trust, or, as the case may be, the deceased's personal representatives.

[F8(7) In these Regulations “instrument constituting the fund” means—

(a)in relation to an open-ended investment company, the instrument of incorporation, and

(b)in relation to an authorised unit trust scheme, the trust deed.

(8) In these Regulations “genuine diversity of ownership condition” has the meaning given by regulation 9A.]

Umbrella companies and umbrella schemes: interpretationU.K.

7.—(1) In these Regulations “umbrella company” has the meaning given by section 468A(4) of ICTA M2, and a reference to a part of an umbrella company is to be construed in accordance with that provision.

(2) For the purposes of these Regulations each of the parts of an umbrella company is regarded as an open-ended investment company and the umbrella company as a whole shall not be so regarded.

(3) In relation to a part of an umbrella company, any reference—

(a)to investments or to scheme property of an open-ended investment company has effect as a reference to such of the investments or to such of the scheme property as under the arrangements form part of the separate pool to which that part of the umbrella company relates, and

(b)a person for the time being having rights in that part is regarded as the owner of shares in the open-ended investment company which that part is regarded as being by virtue of paragraph (2), and not as the owner of shares in the umbrella company itself.

(4) In relation to a part of an umbrella company, any references in these Regulations to the instrument of incorporation or the prospectus in issue for the time being F9... of an open-ended investment company have effect, for the purposes of these Regulations, as references to such parts of the instrument of incorporation or of that prospectus F9... as apply to that part of the umbrella company.

(5) In these Regulations “umbrella scheme” has the meaning given by section 468(8) of ICTA, and a reference to a part of an umbrella scheme is to be construed in accordance with that provision.

(6) For the purposes of these Regulations each of the parts of an umbrella scheme is regarded as an authorised unit trust and the umbrella scheme as a whole is not regarded as an authorised unit trust or as any other form of collective investment scheme.

(7) In relation to a part of an umbrella scheme, any reference—

(a)to investments or to scheme property subject to the trusts of an authorised unit trust has effect as a reference to such of the investments or to such of the scheme property as under the arrangements form part of the separate pool to which that part of the umbrella scheme relates, and

(b)to a unit holder, has effect as a reference to a person for the time being having rights in that separate pool.

(8) In relation to a part of an umbrella scheme, any references in these Regulations to the prospectus in issue for the time being F10... of an authorised unit trust have effect, for the purposes of these Regulations, as references to such parts of that prospectus F10... as apply to that part of the umbrella scheme.

General interpretationU.K.

8.  In these Regulations—

[F11“appropriate regulator” in relation to a person means—

“authorised corporate director”, in relation to an open-ended investment company, means a corporate director of the company acting in the capacity as the director having responsibility for the management of its scheme property, being an authorised person within the meaning given by section 31(2) of FISMA 2000, or if there is no such director, the person for the time being having responsibility for the management of the scheme property of the company and acting in that capacity;

“collective investment scheme” has the meaning given by section 235 of FISMA 2000;

the “Commissioners” means the Commissioners for Revenue and Customs;

[F12“connected person” has the meaning given in—

“creditor relationship” has the meaning given by section 103(1) of FA 1996 M3;

“derivative contract” means—

“investments” do not include cash awaiting investment;

“net asset value” means the value of the assets of the authorised investment fund, after the deduction of specified liabilities;

[F13“non-reporting fund” has the same meaning as in regulation 4(2) of the Offshore Funds Regulations;]

[F13“offshore fund” means a fund within the meaning of section 355 of the Taxation (International and Other Provisions) Act 2010;]

[F13“Offshore Funds Regulations” means the Offshore Funds (Tax) Regulations 2009;]

“owner of shares”, in relation to an open-ended investment company, means a beneficial owner of shares in the company, except where the shares are held on trust (other than a bare trust) or are comprised in the estate of a deceased person, and in such a case the owner of shares, in relation to the company, means the trustees of the trust, or, as the case may be, the deceased's personal representatives;

[F14“prospectus” includes a proposed prospectus, supplements to a prospectus and supplements to a proposed prospectus;]

[F15“reportable income” has the same meaning as in Chapter 5 of Part 3 of the Offshore Funds Regulations;]

“reporting date” means the final day of each annual and each half-yearly accounting period of the authorised investment fund;

[F16“reporting fund” means an offshore fund to which Part 3 of the Offshore Funds Regulations applies]

“residence declaration” is to be construed in accordance with regulation 31;

[F14“Statement of Recommended Practice” means, in relation to any accounting period for which it is required or permitted to be used, the Statement of Recommended Practice relating to authorised investment funds issued by the Investment Management Association in November 2008;]

“tax year”—

[F17“tribunal” means the First-tier Tribunal or, where determined by or under Tribunal Procedure Rules, the Upper Tribunal.]

Abbreviations and general indexU.K.

9.—(1) The Schedule to these Regulations (which contains abbreviations and defined expressions that apply for the purposes of these Regulations) has effect.

(2) Part 1 of the Schedule gives the meaning of the abbreviated references to Acts used in these Regulations.

(3) Part 2 of the Schedule lists the places where expressions used in these Regulations are defined or otherwise explained—

(a)in these Regulations for the purposes of these Regulations, or

(b)in these Regulations for the purposes of a Part or Chapter of these Regulations.

[F18PART 1AU.K.THE GENUINE DIVERSITY OF OWNERSHIP CONDITION

The genuine diversity of ownership conditionU.K.

9A—(1) For the purposes of these Regulations, the genuine diversity of ownership condition is as follows.

(2) The genuine diversity of ownership condition is that an authorised investment fund must—

(a)meet conditions A to C throughout the accounting period; or

(b)comply with paragraph (8).

(3) Condition A is that the fund documents—

(a)contain a statement that units in the fund will be widely available,

(b)specify the intended categories of investor, and

(c)specify that the manager of the fund must market and make available the units in the fund in accordance with paragraph 9A(6)(a).

(4) Condition B is that neither—

(a)the specification of the intended categories of investor, nor

(b)any other terms or conditions governing participation in the fund, whether or not specified in the fund documents,

have a limiting or deterring effect.

(5) In paragraph (4) a limiting or deterring effect means an effect which—

(a)limits investors to a limited number of specific persons or specific groups of connected persons, or

(b)deters a reasonable investor within the intended categories of investor from investing in the fund.

(6) Condition C is that—

(a)units in the fund must be marketed and made available—

(i)sufficiently widely to reach the intended categories of investors, and

(ii)in a manner appropriate to attract those categories of investors; and

(b)a person who is in an intended category of investor can, upon request to the manager of the fund, obtain information about that fund and acquire units in it.

Condition C is subject to paragraph (7).

(7) Condition C shall be treated as being met even if at the relevant time the fund has no capacity to receive additional investments, unless—

(a)the capacity of the fund to receive investments in it is fixed by the fund documents (or otherwise), and

(b)a pre-determined number of specific persons or specific groups of connected persons make investments in the fund which collectively exhausts all, or substantially all, of that capacity.

(8) An authorised investment fund F19... also meets the genuine diversity of ownership condition if—

(a)an investor in the fund is a unit trust scheme [F20, an offshore fund or another authorised investment fund] (a “feeder fund”);

(b)conditions A to C are met in relation to the authorised investment fund after taking into account—

(i)the fund documents relating to the feeder fund, and

(ii)the intended investors in the feeder fund; and

(c)the authorised investment fund and the feeder fund have the same manager (or proposed manager).

[F21(8A) For the purposes of these Regulations, a long-term asset fund is treated as meeting the genuine diversity of ownership condition if—

(a)the fund’s prospectus was published on or before 9th December 2021, or

(b)at least 70% of the shares or units in the fund are held by one or more relevant investors or by the manager of the fund in the capacity as manager.

(8B) In paragraph (8A), “relevant investor” means any of the persons specified in categories A to E.

(8C) Category A is the trustee or manager of—

(a)an authorised unit trust scheme which meets the genuine diversity of ownership condition, or

(b)a unit trust scheme which—

(i)is authorised under the law of a territory outside the United Kingdom in a way which makes it, under that law, the equivalent of an authorised unit trust scheme, and

(ii)meets conditions A to C or complies with paragraph (8).

(8D) Category B is a company—

(a)which is an open-ended investment company which meets the genuine diversity of ownership condition, or

(b)which—

(i)is incorporated under the law of a territory outside the United Kingdom and is, under that law, the equivalent of an open-ended investment company, and

(ii)meets conditions A to C or complies with paragraph (8).

(8E) Category C is a person acting in the course of a long-term insurance business (that is, the activity of effecting or carrying out contracts of long-term insurance within the meaning of the Financial Services and Markets (Regulated Activities) Order 2001) where—

(a)that person—

(i)is authorised under FISMA 2000 to carry on such business, or

(ii)has an equivalent authorisation under the law of a territory outside the United Kingdom to carry on such business, and

(b)if that person is a company, it is not a close company.

(8F) Category D is a person who cannot be liable for corporation tax or income tax (as relevant) on the grounds of sovereign immunity.

(8G) Category E is the trustee, manager or administrator of a pension scheme (within the meaning given by section 150(1) of the Finance Act 2004) other than an investment regulated pension scheme (within the meaning given by paragraphs 1 and 2 of Schedule 29A to that Act).

(8H) For the purposes of paragraph (8E)(b) (category C), in applying the rules in Chapter 2 of Part 10 of CTA 2010 to determine whether a company is “a close company”, section 442(a) (non-UK resident companies) is to be treated as omitted.]

(9) In this Part “fund documents” means—

(a)the instrument constituting the fund, and

(b)the fund’s prospectus in issue for the time being F22... .

Clearance in relation to the genuine diversity of ownership conditionU.K.

9B.—(1) An application for clearance that an authorised investment fund meets the genuine diversity of ownership condition (see regulation 9A) may be made in writing to the Commissioners by the manager (or proposed manager) of an authorised investment fund.

(2) An application for clearance must be accompanied by the fund documents in the form in which it is proposed that those documents will apply at the beginning of the first accounting period of the fund for which clearance is sought.

(3) If regulation 9A(2)(b) and (8) applies, an application for clearance by the authorised investment fund must be accompanied by—

(a)the documents specified in paragraph (2), and

(b)the fund documents of the feeder fund in the form in which it is proposed that those documents will apply at the beginning of the first accounting period of the fund for which clearance is sought.

(4) The Commissioners may require the manager (or proposed manager) to provide further particulars if they believe that full particulars of the fund have not been provided.

(5) The Commissioners must notify the applicant within 28 days of the receipt of the particulars (or, if paragraph (4) applies, of all further particulars required) that they—

(a)give clearance that the fund meets the genuine diversity of ownership condition,

(b)give that clearance subject to conditions, or

(c)refuse to give that clearance.

(6) An authorised investment fund (and investors in that fund) may not rely on a clearance given under this regulation if—

(a)at the beginning of the first accounting period of the fund to which the clearance relates (and at the beginning of each subsequent accounting period), a relevant statement in the fund documents in issue for the time being is not in accordance with a relevant statement in the documents considered by the Commissioners before giving clearance,

(b)the fund acts or is operated in contravention of a relevant statement in the fund documents,

(c)the fund documents are materially amended, or

(d)the fund is operated otherwise than in accordance with condition C of the genuine diversity of ownership condition (see regulation 9A(6)).

(7) If regulation 9A(2)(b) and (8) applies an authorised investment fund (and investors in that fund) may not rely on a clearance given under this regulation if any of sub-paragraphs (a) to (d) of paragraph (6) apply in relation to either the authorised investment fund or the feeder fund.

(8) Paragraph (6)(c) does not apply if the manager of the fund has obtained a clearance given under this regulation which applies to the amendment.

(9) For the purposes of paragraph (6)(c), a material amendment is one that may reasonably be construed as causing, or likely to cause, the fund to fail to meet the genuine diversity of ownership condition in relation to any accounting period.]

PART 2U.K.THE TAX TREATMENT OF AUTHORISED INVESTMENT FUNDS

Loan relationships and derivative contracts: exclusion of capital profits, gains or lossesU.K.

General rule for loan relationships: exclusion of capital profits, gains or lossesU.K.

10.—(1) This regulation applies if any profits, gains or losses arising to an authorised investment fund from a creditor relationship in an accounting period are capital profits, gains or losses.

(2) For the purposes of Chapter 2 of Part 4 of FA 1996 M6 (loan relationships) those profits, gains or losses must not be brought into account as credits or debits.

(3) Regulation 12 explains what is meant by “capital profits, gains or losses” in the case of an authorised investment fund that prepares accounts in accordance with UK generally accepted accounting practice.

[F23(4) This regulation is subject to regulation 14B (tax treatment of qualified investor schemes.]

General rule for derivative contracts: exclusion of capital profits, gains or lossesU.K.

11.—(1) This regulation applies if any profits, gains or losses arising to an authorised investment fund from a derivative contract in an accounting period are capital profits, gains or losses.

(2) For the purposes of Schedule 26 to FA 2002 M7 (derivative contracts) those profits, gains or losses must not be brought into account as credits or debits.

(3) Regulation 12 explains what is meant by “capital profits, gains or losses” in the case of an authorised investment fund that prepares accounts in accordance with UK generally accepted accounting practice.

[F24(4) This regulation is subject to regulation 14B (tax treatment of qualified investor schemes).]

Accounts prepared in accordance with UK generally accepted accounting practiceU.K.

12.—(1) In the case of an authorised investment fund that prepares accounts in accordance with UK generally accepted accounting practice, capital profits, gains or losses arising from a creditor relationship in an accounting period, or capital profits, gains or losses arising from a derivative contract in an accounting period, are such profits, gains or losses as fall to be dealt with under [F25the heading “net capital gains/losses”] in the statement of total return for the accounting period.

(2) For the purposes of paragraph (1), the statement of total return for an accounting period is the statement of total return which, in accordance with the Statement of Recommended Practice used for the accounting period, must be included in the accounts contained in the annual report of the authorised investment fund which deals with the accounting period.

F26(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F27... Interest distributions and deficitsU.K.

[F28Deduction of expensesU.K.

12A.  Where an authorised investment fund makes an interest distribution for a distribution period, the amount that can be deducted under Step 2 in section 4(2) of CTA 2010 (amounts that can be relieved against the company’s total profits of the period) cannot exceed an amount that would reduce the total profits chargeable to corporation tax for the accounting period in which the last day of the distribution period falls to below the total amount chargeable to corporation tax in accordance with Part 4 of CTA 2009 for that accounting period.]

Treatment of interest distributions for purposes of loan relationshipsU.K.

13.—(1) Chapter 2 of Part 4 of FA 1996 (loan relationships) has effect in relation to an authorised investment fund and to an interest distribution paid by that fund as it would have effect if the interest distribution were interest payable on a loan to the authorised investment fund and were, accordingly, interest under a loan relationship to which the authorised investment fund were a party.

[F29(1A) But paragraph (1) only applies to the extent that the interest distribution is derived from income [F30other than income chargeable to corporation tax in accordance with Part 4 of CTA 2009 and] in respect of which the legal owner is charged to corporation tax.]

(2) For the purposes of these Regulations, an interest distribution is treated as paid if it is credited to the capital part of the scheme property of an authorised investment fund on behalf of a participant in respect of the participant's accumulation units.

(3) This regulation is subject to regulation 14 [F31and regulation 14B (tax treatment of qualified investor schemes)].

[F32(4) In this regulation an “interest distribution” includes a TEF distribution (non-dividend) (see regulation 69Z61(3)).]

Treatment of deficits on loan relationshipsU.K.

14.  Section 83(2)(c) of FA 1996 (carrying back of non-trading deficit on loan relationships) shall not have effect in relation to the loan relationships of an authorised investment fund (so that, accordingly, if for any accounting period there is a deficit on the loan relationships of the authorised investment fund, the deficit may not be carried back to be set off against profits for earlier accounting periods).

[F33This is subject to regulation 14B (tax treatment of qualified investor schemes).]

[F34Authorised investment funds having interests in offshore non-reporting fundsU.K.

Interests in offshore non-reporting funds: generalU.K.

14ZA.—(1) Regulation 14ZB applies if—

(a)an authorised investment fund disposes of an asset which is an interest in a non-reporting fund (“the asset”); and

(b)the conditions in paragraph (2) are satisfied for the period beginning with the date on which the authorised investment fund acquired the asset and ending on the date of the disposal.

(2) The conditions are that—

(a)the authorised investment fund has access to the accounts of the non-reporting fund,

(b)the authorised investment fund had sufficient information about the non-reporting fund referred to in paragraph (1)(a) to enable it to prepare computations of reportable income for the non-reporting fund for every accounting period which, if the non-reporting fund were a reporting fund, would be a reporting period ending within the period mentioned in paragraph (1)(b),

(c)the authorised investment fund has prepared such computations, and

(d)any excess of the authorised investment fund’s share of the reportable income of the non-reporting fund over the authorised investment fund’s share of the distributions made by the non-reporting fund is included in the amount available for income allocation by the authorised investment fund for each reporting period of the authorised investment fund which falls within the period mentioned in paragraph (1)(b).

(3) An authorised investment fund has an interest in a non-reporting fund if and to the extent that it has an interest in such a fund for the purposes of the Offshore Funds Regulations.

(4) For the purposes of the computations mentioned in paragraph (2)(b), regulation 80 of the Offshore Funds Regulations applies if (and only if) the non-reporting fund is a UCITS fund.

(5) In this regulation, “UCITS fund” has the same meaning as in regulation 12 of the Offshore Funds Regulations and “reporting period” has the same meaning as in regulation 91 of those Regulations.

Treatment of disposal of interest in non-reporting fundU.K.

14ZB.  No tax shall be charged on the authorised investment fund under regulation 17 of the Offshore Funds Regulations on the disposal by the authorised investment fund of an asset which is an interest in a non-reporting fund at the time of the disposal.

Treatment of interest in non-reporting fund: cases where the conditions in regulation 14ZA(2) would not be satisfiedU.K.

14ZC.—(1) This regulation applies in relation to an asset of an authorised investment fund (“the asset”) which—

(a)is an interest in a non-reporting fund, but

(b)in relation to which the conditions in regulation 14ZA(2) would not (apart from this regulation) be satisfied for the whole of the period specified in regulation 14ZA(1)(b) in relation to the asset.

(2) Paragraph (4) applies if the authorised investment fund, in relation to the asset, reasonably expects to satisfy the conditions in regulation 14ZA(2) for the period beginning with a date to be determined in accordance with paragraph (3) (“the deemed start date”) and ending on the date of the disposal of the asset.

(3) The deemed start date is a date to be determined by the authorised investment fund but which must not be earlier than 6th March 2011.

(4) The authorised investment fund is treated for all purposes (including for the purposes of determining the beginning of the period mentioned in regulation 14ZA(1)(b)) as if it had, on the deemed start date, disposed of the asset (and not satisfied the conditions in regulation 14ZA(2)) and immediately reacquired the asset for a consideration equal to its market value on the deemed start date.

(5) The authorised investment fund must notify the Commissioners of the deemed start date by making an appropriate entry in its tax return for the accounting period in which the deemed start date falls.]

[F35Authorised investment funds with limited investment powers – stamp duty reserve taxU.K.

14A.—(1) Where, for the relevant period—

(a)an authorised investment fund is constituted as a unit trust scheme (“the scheme”); and

(b)conditions A to D in this regulation are met,

paragraph 2 of Schedule 19 to the Finance Act 1999 (“FA 1999”) shall not apply to a surrender to the scheme that would, but for this regulation, be taxable under Part II of that Schedule.

(2) Condition A is that the scheme must be dedicated to investment in the shares of a specified open-ended investment company to which Part 4A applies (“the PAIF”).

(3) Condition B is that—

(a)the trust deed of the scheme must specify that the scheme may only invest in the PAIF; and

(b)the prospectus for the scheme must state that the scheme may only invest in the PAIF.

(4) Condition C is when an investment in the scheme is made, the scheme must (within one working day of that investment) invest in the PAIF an amount equal to the investment.

(5) Condition D is that when a withdrawal of investment from the scheme is made, the scheme must (within one working day of that withdrawal) withdraw from the PAIF an amount equal to the withdrawal.

(6) For the purposes of complying with conditions C and D, an investment in the scheme may not be set off against a withdrawal from the scheme.

(7) A scheme will not be dedicated to investment in the PAIF for the purpose of condition B if it has any assets other than shares in the PAIF and money.

(8) In this regulation—

“relevant period” means the relevant two-week period referred to in paragraph 4(2) of Schedule 19 to FA 1999.

“surrender” means a surrender within the meaning of paragraph 2 of Schedule 19 to FA 1999.

“working day” means a day other than—

“money” includes cash held on deposit but does not include securities of any kind.]

[F36Treatments applying to authorised investment funds with specific investment purposesU.K.

Index tracking fundsU.K.

14ZD.—(1) This regulation applies if—

(a)an authorised investment fund has an interest in a non-reporting fund, and

(b)the conditions in paragraph (2) are met throughout the relevant period.

(2) The conditions are that—

(a)in accordance with either the authorised investment fund’s prospectus or the instrument constituting the authorised investment fund, the aim of the authorised investment fund’s investment policy is to replicate the performance of a qualifying index,

(b)the main purpose of the investment in the non-reporting fund is to represent the composition of the qualifying index, and

(c)the capital and income returns of the authorised investment fund replicate as closely as practicable the returns of the investments comprised in the qualifying index.

(3) For the purposes of paragraph (2) an index is a “qualifying index” if—

(a)it is based solely on the value of securities listed on a recognised stock exchange or admitted to trading on a regulated market,

(b)either [F37the Financial Conduct Authority] or an authority responsible for regulating offshore funds recognises the index on the basis that—

(i)its composition is sufficiently diverse,

(ii)it represents an adequate benchmark for the market to which it refers, and

(iii)it is published in such a way that it is widely available, and

(c)it is calculated and published by a body which is managed independently from the management of the authorised investment fund.

(4) Regulation 17 of the Offshore Funds Regulations does not apply in respect of a disposal of the interest in the non-reporting fund by the authorised investment fund.

(5) In this regulation “the relevant period” means the period—

(a)starting on the day the authorised investment fund acquires the interest in the non-reporting fund (or any part of it), and

(b)ending on the day of the disposal of the interest.

(6) In this regulation—

F38(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F39(b)“regulated market” means—

(i)a UK regulated market within the meaning given by Article 2.1(13A) of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments,

(ii)an EU regulated market within the meaning given by Article 2.1(13B) of that Regulation, and

[F40(iii)a Gibraltar regulated market within the meaning given by Article 26(11)(b)(i) of that Regulation.]]]

Authorised investment funds with limited investment powers – stamp duty reserve taxU.K.

F4114A.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F42PART 2AU.K.Qualified Investor Schemes

Tax treatment of qualified investor schemesU.K.

14B.—(1) The provisions in paragraph (2) shall not apply to a qualified investor scheme in relation to an accounting period of the scheme unless the genuine diversity of ownership condition (see regulation [F439A]) is met in relation to that accounting period.

(2) The provisions referred to in paragraph (1) are—

(a)the provisions of Part 2 of these Regulations,

[F44(aa)the provisions of Part 4 of these Regulations,]

(b)the provisions of Part 4A of these Regulations,

(c)where the qualified investor scheme is an authorised unit trust scheme, section 468(1A) of ICTA,

(d)where the qualified investor scheme is an open-ended investment company, section 468A(1) of ICTA,

(e)in subsection (1) of section 99 of TCGA 1992 (as modified by these Regulations) the words “except that nothing in this section” to the end of that sub-section, and

(f)section 100 of TCGA 1992.

(3) Where the genuine diversity of ownership condition is not met in relation to an accounting period of the scheme—

F45(a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F46(b)the total amount available for income allocation to participants must only be allocated in accordance with paragraph (1)(b) of regulation 17 (allocation of income)] [F47, and

(c)Part 3A of CTA 2010 (companies with small profits) does not apply.]

(4) In these Regulations a “qualified investor scheme” means a fund, authorised by the [F48appropriate regulator], in which a statement that the fund is a qualified investor scheme is included in the instrument constituting the scheme.

F49(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ]

The genuine diversity of ownership conditionU.K.

F5014C.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Clearance in relation to the genuine diversity of ownership conditionU.K.

F5114D.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F52PART 2AAU.K.LONG-TERM ASSET FUNDS

Tax treatment of long-term asset fundsU.K.

14DA.—(1) The provisions in paragraph (2) do not apply to a long-term asset fund in relation to an accounting period of the fund unless the genuine diversity of ownership condition is met in relation to that accounting period.

(2) The provisions referred to in paragraph (1) are—

(a)the provisions of Part 2 of these Regulations,

(b)the provisions of Part 4 of these Regulations,

(c)the provisions of Part 4A of these Regulations,

(d)in section 99(1) of TCGA 1992, the words from “except that nothing in this section” to the end of that subsection,

(e)section 100 of TCGA 1992,

(f)where the fund is an open-ended investment company, section 614 of CTA 2010, and

(g)where the fund is an authorised unit trust, section 618 of CTA 2010.

(3) Where the genuine diversity of ownership condition is not met in relation to an accounting period of the fund—

(a)Part 3A of CTA 2010 (companies with small profits) does not apply, and

(b)the total amount shown in the distribution accounts available for distribution to participants must only be shown as available for distribution in accordance with paragraph (1)(b) of regulation 17 (allocation of income for distribution as dividends).

(4) In these Regulations, a “long-term asset fund” means an authorised investment fund whose instrument constituting the fund contains a statement that the fund is a long-term asset fund.]

[F53PART 2BU.K.DIVERSELY OWNED AIFS

Tax treatment of diversely owned AIFsU.K.

14E.—(1)  This regulation applies to an authorised investment fund in respect of an accounting period if—

(a)the fund carries out an investment transaction in that period, and

(b)the fund meets the genuine diversity of ownership condition in relation to that period.

(2) In these Regulations an authorised investment fund to which this regulation applies is referred to as a “diversely owned AIF”.

(3) If the profits or losses, as the case may be, arising from an investment transaction are capital profits, gains or losses, that investment transaction shall be treated as a non-trading transaction of the diversely owned AIF for the purposes of corporation tax.

(4) Chapter 2 of Part 3 of CTA 2009 (income taxed as trade profits) does not apply to capital profits and losses arising from such an investment transaction.

(5) For the purposes of these Regulations “investment transaction” means a transaction specified in [F54regulation 2 of the Investment Transactions (Tax) Regulations 2014].

(6) For the purposes of paragraphs (3) and (4) capital profits, gains or losses arising from an investment transaction in an accounting period are such profits, gains or losses as fall to be dealt with under the heading “net capital gains/losses” in the statement of total return for an accounting period.

(7) For the purposes of paragraph (6), the “statement of total return for an accounting period” has the same meaning as in regulation 12(2).

Meaning of “investment transaction”U.K.

F5514F.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of relevant contracts: generalU.K.

F5514G.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of relevant contract: optionsU.K.

F5514H.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of relevant contract: futuresU.K.

F5514I.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of relevant contract: options and futures - general provisionsU.K.

F5514J.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of relevant contract: contract for differencesU.K.

F5514K.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loan relationships or related transactionsU.K.

F5514L.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Units in a collective investment schemeU.K.

F5514M.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Carbon emission trading productsU.K.

F5514N.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .]

PART 3U.K.DISTRIBUTIONS MADE BY AUTHORISED INVESTMENT FUNDS

PreliminaryU.K.

InterpretationU.K.

15.—[F56(1) In these Regulations—

(a)“income allocation” means the distribution of an amount to participants; and

(b)“distribution” includes the crediting of an amount to the capital part of the scheme property on behalf of a participant in respect of the participant’s accumulation units.]

(2) In these Regulations “distribution period”, in relation to an authorised investment fund, means a period by reference to which the total amount available for [F57income allocation to participants] is ascertained.

F58(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(4) In these Regulations the “distribution date” for a distribution period of an authorised investment fund means—

(a)the date specified by or in accordance with the terms of the trust or the instrument of incorporation of the company for any distribution for that distribution period, or

(b)if no date is specified, the last day of that distribution period.

Funds excluded from the ambit of this PartU.K.

16.  This Part does not apply to an authorised investment fund if the fund—

(a)is a registered pension scheme within the meaning of Part 4 of the Finance Act 2004 M8, or

(b)is treated, under paragraph 1(1) of Schedule 36 to that Act, as having become such a scheme.

F59...U.K.

[F60Allocation of income]U.K.

17.—[F61(1) The total amount available for income allocation must be allocated in one of the following ways—

(a)for distribution as yearly interest (see regulations 18 to 21); or

(b)for distribution as dividends (see regulation 22).]

[F62(1A) Paragraph (1) does not apply in relation to an authorised investment fund to which Part 4A or 4B applies.]

F63(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Interest distributionsU.K.

Interest distributions: generalU.K.

18.—(1) Paragraph (2) applies where the total amount [F64available for income allocation is allocated] for distribution as yearly interest.

(2) The Tax Acts shall have effect as if the total amount were payments of yearly interest made on the distribution date by the authorised investment fund to the participants in proportion to their rights.

[F65(2A) For the purposes of Part 10 (Corporate Interest Restriction) of TIOPA 2010, an interest distribution is treated as not being a tax-interest expense amount of the authorised investment fund.]

(3) In these Regulations an “interest distribution” means a payment of yearly interest treated as made by virtue of paragraph (2) (including a payment of interest treated as made to a participant who is not chargeable to income tax).

(4) This regulation is subject to—

(a)regulation 19 (the qualifying investments test), and

(b)regulation 23 (treatment of de minimis amounts).

The qualifying investments testU.K.

19.—(1) No amount may be shown as available for distribution as yearly interest unless the authorised investment fund in question satisfies the qualifying investments test throughout the distribution period.

(2) An authorised investment fund satisfies the qualifying investments test throughout a distribution period (the “relevant period”) if, at all times in that period, the market value of the qualifying investments exceeds 60% of the market value of all the investments of the fund.

(3) Regulations 20 and 21 deal with the meaning of the expression “qualifying investments”.

Meaning of “qualifying investments”U.K.

20.  In these Regulations “qualifying investments”, in relation to an authorised investment fund, means the investments of that fund which fall within any of the following categories (read, as appropriate, with any applicable provision in regulation 21)—

• Category 1

  Money placed at interest.

• Category 2

  Securities.

• Category 3

  Shares in a building society.

• Category 4

  Qualifying units in another authorised investment fund.

• [F66Category 4A

  Qualifying units in an offshore fund.]

• Category 5

  Derivative contracts whose underlying subject matter consists wholly of any one or more of the matters referred to in categories 1 to [F674A] and currency.

• Category 6

  Contracts for differences whose underlying subject matter consists wholly of any one or more of interest rates, creditworthiness and currency.

• Category 7

  Derivative contracts not within categories 5 or 6 where there is a hedging relationship between the derivative contract and an asset within categories 1 to [F674A].

• Category 8

  Alternative finance arrangements.

Meaning of “qualifying investments”: further provisionsU.K.

21.—(1) This regulation applies for the purposes of regulation 20.

(2) For the purposes of category 2 “securities” do not include shares in a company.

(3) For the purposes of category 4 units in another authorised investment fund are qualifying units at any time in the relevant period if, and only if, the other authorised investment fund would itself (on the relevant assumption) satisfy the qualifying investments test throughout that period.

(4) For the purposes of paragraph (3) the relevant assumption is that the only investments of the other authorised investment fund which are to be regarded as qualifying investments are those falling within categories 1 to 3 and 5 to 8.

(5) In paragraph (4) references to investments of an authorised investment fund—

(a)in the case of an open-ended investment company are references to investments comprised in the scheme property of that company, but do not include references to cash awaiting investment, and

(b)in the case of an authorised unit trust are references to investments subject to the trusts of that authorised unit trust, but do not include references to cash awaiting investment.

[F68(5A) For the purpose of category 4A, units in an offshore fund are qualifying units at any time in the relevant period if, and only if, the offshore fund would itself (on the relevant assumption) satisfy the qualifying investments test throughout that period.

(5B) For the purposes of paragraph (5A), the relevant assumption is that the only investments of the offshore fund which are to be regarded as qualifying investments are those falling within categories 1 to 3 and 5 to 8.

(5C) In paragraph (5B), references to investments of an offshore fund—

(a)in the case of an offshore fund which is a company, are references to investments which are the investments of the company, but do not include cash awaiting investment, and

(b)in the case of any other offshore fund, are references to investments subject to the trust or other arrangements constituting the investments of the other offshore fund, but do not include cash awaiting investment.]

(6) For the purposes of categories 5 and 6 “underlying subject matter” has the same meaning as in paragraph 11 of Schedule 26 to FA 2002 M9.

(7) For the purposes of categories 5 and 6 underlying subject matter may consist of currency only if and to the extent that there is a hedging relationship between the contract and a qualifying investment falling within categories 1 to 4.

(8) In paragraph (7) “hedging relationship” has the meaning given by paragraph 12(14) of Schedule 26 to FA 2002 M10.

(9) For the purposes of category 6 a “contract for differences” has the same meaning as in paragraph 12 of Schedule 26 to FA 2002 M11.

(10) For the purposes of category 7 a fund has a hedging relationship between a derivative contract on the one hand (“the hedging instrument”) and an asset on the other (“the hedged item”) if and to the extent that—

(a)the hedging instrument and the hedged item are designated by the fund as a hedge, or

(b)in any other case the hedging instrument is intended to act as a hedge of the exposure to changes in fair value of a hedged item which is a recognised asset or an identified portion of such an asset that is attributable to a particular risk and could affect the total net return of the fund.

(11) For the purposes of category 8 “alternative finance arrangements” has the meaning given by section 46(1) of the Finance Act 2005 M12.

Dividend distributionsU.K.

Dividend distributions: generalU.K.

22.—(1) Paragraph (2) applies where the total amount [F69available for income allocation is allocated] for distribution as dividends.

(2) The Tax Acts shall have effect as if the total amount were dividends on shares paid on the distribution date by the authorised investment fund to the participants in proportion to their rights [F70(but see regulation 96A (modification of CTA 2009))].

(3) In these Regulations a “dividend distribution” means a dividend treated as paid by virtue of paragraph (2) (including a dividend treated as paid to a participant who is not chargeable to corporation tax).

(4) This regulation is subject to regulation 23 (treatment of de minimis amounts).

De minimis amountsU.K.

Provisions applying if amounts available for distribution are de minimisU.K.

23.—(1) An authorised investment fund is not treated as making a distribution for a distribution period if conditions A to D are met.

(2) Condition A is that, in accordance with rules made by the [F71appropriate regulator], the authorised investment fund has an agreed de minimis limit.

(3) Condition B is that the authorised investment fund—

[F72(a)has calculated that the total income available for income allocations is a de minimis amount, and

(b)chooses to waive the allocation of that de minimis amount.]

(4) Condition C is that the de minimis amount is carried forward to the next distribution period as an amount available for distribution to participants.

(5) Condition D is that none of the units of the authorised investment fund in issue on the distribution date are in bearer form.

(6) If this regulation applies, the authorised investment fund is not required to comply with the requirements of section 234A of ICTA M13 (information relating to distributions) in respect of the de minimis amount for the distribution period in question.

(7) In this regulation—

the “de minimis limit”, in relation to an authorised investment fund, means an amount in respect of which a distribution of income of the fund is not required if the total amount [F73available for income allocation] to participants does not exceed that amount, and

“de minimis amount” means an amount falling within the de minimis limit.

PART 4U.K.THE TREATMENT OF PARTICIPANTS IN AUTHORISED INVESTMENT FUNDS

CHAPTER 1U.K.PRELIMINARY PROVISIONS

Structure of this PartU.K.

24.  The structure of this Part of these Regulations is as follows—

• this Chapter contains preliminary provisions;

• Chapter 2 contains provisions relating to the tax treatment of participants chargeable to income tax;

• Chapter 3 contains provisions relating to the tax treatment of participants chargeable to corporation tax;

• F74...

Funds excluded from the ambit of this PartU.K.

25.  This Part does not apply to an authorised investment fund if the fund—

(a)is a registered pension scheme within the meaning of Part 4 of the Finance Act 2004 M14, or

(b)is treated, under paragraph 1(1) of Schedule 36 to that Act, as having become such a scheme.

CHAPTER 2U.K.PARTICIPANTS CHARGEABLE TO INCOME TAX

Deduction of tax from interest distributions: generalU.K.

Deduction of tax where interest distributions madeU.K.

26.—(1) This regulation applies if an interest distribution is made for a distribution period to a participant chargeable to income tax.

(2) Any obligation to deduct a sum under [F75section 874 of ITA 2007] is subject to the provisions of this regulation.

(3) In this Part the “deduction obligation” means the obligation specified in paragraph (2).

(4) The deduction obligation does not apply to the interest distribution if—

(a)the participant is a company;

(b)the participant consists of the trustees of a unit trust scheme;

(c)the reputable intermediary condition is met with respect to a participant on the distribution date (see regulation 27); F76...

(d)the residence condition is met with respect to a participant on the distribution date (see regulation 30); F77...

F77(e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . [F78, or

(f)the offshore marketing condition is met with respect to the class of units in relation to which the distribution is made (see regulation 33A)].

(5) But if the participant is a company which is the trustee of the trust to which (or under which) the interest distribution is made (or received), the deduction obligation is not excluded by virtue of paragraph (4)(a).

(6) In its application to an interest distribution to a participant in respect of accumulation units, the deduction obligation is an obligation to deduct a sum out of the amount being credited to scheme capital on the participant's behalf.

The reputable intermediary conditionU.K.

The reputable intermediary conditionU.K.

27.—(1) The reputable intermediary condition is met with respect to a participant on the distribution date if conditions A to C are met.

(2) Condition A is that the interest distribution is paid on behalf of the participant to a company.

(3) Condition B is that the legal owner has reasonable grounds for believing that the participant is not F79... resident in the United Kingdom.

(4) Condition C is that the company mentioned in paragraph (2)—

(a)is subject to the EC Money Laundering Directive,

(b)is subject to equivalent non-EC provisions, or

(c)is a company which—

(i)is resident in a regulating country or territory, and

(ii)is an associated company of a company which is subject to paragraph (a) or (b).

The reputable intermediary condition: further provisionsU.K.

28.—(1) This regulation applies for the purposes of Condition C in regulation 27.

(2) A company is subject to the EC Money Laundering Directive if it is a credit institution or financial institution as defined by Article 1 of Directive 91/308/EEC, as amended by Directive 2001/97/EC.

(3) A company is subject to equivalent non-EC provisions if it is required by the law of any country or territory which is not a member State to comply with requirements similar to those which, under Article 3 of that Directive (as so amended), member States must ensure are complied with by credit institutions and financial institutions.

(4) A country or territory is a regulating country or territory if it either is a member State or imposes requirements similar to those which, under Article 3 of that Directive (as so amended), member States must ensure are complied with by credit institutions and financial institutions.

(5) A company is to be treated as another's associated company if it would be so treated for the purposes of Part 11 of ICTA (close companies) (see section 416 of that Act).

Consequences of reasonable but incorrect beliefU.K.

29.—(1) This regulation applies if conditions A to D are met.

(2) Condition A is that an interest distribution is made to a participant.

(3) Condition B is that the legal owner, in reliance on the reputable intermediary condition being met with respect to the participant, does not comply with the deduction obligation in relation to the interest distribution.

(4) Condition C is that the deduction obligation would apply but for the reputable intermediary condition being met.

(5) Condition D is that (contrary to the belief of the legal owner) the participant is in fact F80... resident in the United Kingdom.

(6) Section 350 of ICTA M15 (charge to tax where payments made under section 349) and Schedule 16 to that Act M16 (collection of income tax on company payments which are not distributions) have effect as if the deduction obligation applied.

The residence conditionU.K.

The residence conditionU.K.

30.—(1) The residence condition is met with respect to a participant on the distribution date if any of conditions A to E is met.

(2) Condition A is that, in relation to an interest distribution which is not made to or received under a trust, there is a valid declaration, made by the participant, that the participant is not F81... resident in the United Kingdom.

(3) Condition B is—

(a)that the participant holds the units as the personal representative of a deceased person, and

(b)that the deceased, before his death, made a declaration, valid at the time of his death, that he was not F82... resident in the United Kingdom.

(4) Condition C is—

(a)that the participant holds the units as the personal representative of a deceased person, and

(b)that the personal representative has made a declaration that the deceased, immediately before his death, was not F83... resident in the United Kingdom.

(5) Condition D is that, in the case of an interest distribution made to or received under a trust where the whole of the income is, or falls to be treated as, or under any provision of the Tax Acts is deemed to be, the income of a person other than the trustees of that trust, there is a valid declaration, made by the person in question that [F84the person is] not resident in the United Kingdom.

(6) Condition E is that, in circumstances in which condition D does not apply and with respect to a participant in the case of an interest distribution made to or received under a trust, there is a valid declaration, made by the trustees of that trust that—

(a)the trustees are not resident in the United Kingdom, and

(b)each beneficiary of the trust is F85... not resident in the United Kingdom.

Residence declarationsU.K.

31.—(1) A declaration made for the purposes of regulation 30 must—

(a)be in such form as may be required or authorised by the Commissioners;

(b)be made in writing to the legal owner of the authorised investment fund in question; and

(c)contain any details or undertakings required by paragraphs (2) to (4) below.

(2) A declaration made for the purposes of condition A or B in regulation 30 must contain—

(a)the name and principal residential address of the person making it; and

(b)an undertaking that he will notify the legal owner if he becomes F86... resident in the United Kingdom.

(3) A declaration made for the purposes of condition C in regulation 30 must contain the name of the deceased and his principal residential address immediately before his death.

(4) A declaration made for the purposes of condition D or E in regulation 30 must contain—

(a)the names and principal residential addresses of the trustees of the trust or, in the case of a trustee which is a company, the name of the company and the address of its registered or principal office;

(b)the names and principal residential addresses of the beneficiaries of the trust or, in the case of a beneficiary which is a company, the name of the company and the address of its registered or principal office; and

(c)an undertaking that the trustees of the trust will notify the legal owner of the authorised investment fund in question if—

(i)they become resident in the United Kingdom,

(ii)any beneficiary of the trust named in the declaration becomes F87... resident in the United Kingdom, or

(iii)any person who becomes a beneficiary of the trust after the making of the declaration either is at the time of becoming a beneficiary, or subsequently becomes, F87... resident in the United Kingdom.

References to beneficiaries in regulations 30 and 31U.K.

32.  In regulations 30 and 31 references to a beneficiary are references to any person who is known to the trustees of the trust to be either—

(a)a person who is or will or may become, entitled to any income of the trust, whether in the form of income or not, or

(b)a person to whom any such income may be paid, or for whose benefit any such income may be applied, whether in the form of income or not, in the exercise of a discretion by them.

Interest distributions: the position of the legal ownerU.K.

33.—(1) For the purposes of determining whether an interest distribution should be made with or without any deduction, the legal owner is entitled to treat a declaration made for the purposes of regulation 30 as valid.

(2) But the legal owner may not treat a declaration as valid if condition A or B is met.

(3) Condition A is that the legal owner receives a notification in compliance with an undertaking under regulation 31 that a person in question has become resident F88... in the United Kingdom.

(4) Condition B is that the legal owner comes into possession of information by some other means which indicates that such a person is or may be resident F88... in the United Kingdom.

[F89The offshore marketing conditionU.K.

33A.  The offshore marketing condition is met with respect to a class of units if—

(a)marketing of units of that class is not directed to investors resident in the United Kingdom, and

(b)before units of that class are acquired, information in relation to those units is available to investors to the effect that—

(i)no sum representing income tax will be deducted from any interest distribution in relation to those units, and

(ii)an investor must notify HM Revenue and Customs of any distribution in relation to such units if the investor is chargeable to income tax for the tax year in which the distribution date falls.]

The non-liability conditionU.K.

The non-liability conditionU.K.

F9034.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Qualifying certificatesU.K.

F9035.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The contents conditionU.K.

F9036.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The supplier conditionU.K.

F9037.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The time limit conditionU.K.

F9038.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The continuing validity conditionU.K.

F9039.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The qualifying circumstances conditionU.K.

F9040.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The joint holding conditionU.K.

F9041.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Qualifying certificates valid for only part of jointly held accounts: introductoryU.K.

F9042.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Qualifying certificates valid for only part of jointly held accounts: the general ruleU.K.

F9043.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Qualifying certificates valid for only part of jointly held accounts: further provisionsU.K.

F9044.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consequences of notice under regulation 39(6)U.K.

F9045.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Qualifying certificate not in writingU.K.

F9046.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F91Annual payments to non-residentsU.K.

Annual Payments – duty to deduct income taxU.K.

46A.—(1) An annual payment made to a participant which meets the conditions in paragraphs (2) to (6) is not a qualifying annual payment for the purposes of Chapter 6 of Part 15 of ITA 2007 (deduction from annual payments and royalties).

(2) The payment must be charged to income tax under Chapter 7 of Part 5 of ITTOIA 2005 (annual payments not otherwise charged).

(3) The payment must be made in respect of the participant’s interest in an authorised investment fund other than a Property AIF.

(4) The payment and the amount of the payment must be directly or indirectly referable to, and must not be more than, any management fees paid to the manager of the authorised investment fund in respect of the participant’s interest in the fund.

(5) Any management fees must not exceed an amount representing a reasonable commercial amount in all the circumstances.

(6) At the time the payment is made, the person making the payment must have reasonable grounds for believing [F92that—

(a)the participant is not resident in the United Kingdom, or

(b)the payment is made in respect a class of units in relation to which of the offshore marketing condition in regulation 33A is met.]

Consequences of reasonable but incorrect beliefU.K.

46B.—(1) This regulation applies if—

(a)an annual payment is made to a participant without a sum representing income tax on the payment being deducted from it,

(b)at the time the payment is made, the condition in [F93regulation 46A(6)(a)] is met,

(c)the payment would be a qualifying annual payment but for that condition being met, and

(d)at the time the payment is made, the participant is resident in the United Kingdom.

(2) Section 900 (deduction from commercial payments made by individuals) and section 901 (deduction from annual payments made by other persons) of ITA 2007 apply as if the payment were a qualifying annual payment.]

CHAPTER 3U.K.PARTICIPANTS CHARGEABLE TO CORPORATION TAX

Interest distributionsU.K.

The obligation to deduct taxU.K.

47.—(1) This regulation applies if an interest distribution is made for a distribution period to a participant chargeable to corporation tax.

(2) The deduction obligation does not apply to the interest distribution.

(3) But if the participant is a company which is the trustee of the trust to which (or under which) the interest distribution is made (or received), the deduction obligation is not excluded by virtue of paragraph (2).

(4) In its application to an interest distribution to a participant in respect of accumulation units, the deduction obligation is an obligation to deduct a sum out of the amount being invested on the participant's behalf.

Dividend distributionsU.K.

GeneralU.K.

48.—(1) Paragraph (2) applies if—

(a)a dividend distribution for a distribution period is made to a participant by the legal owner of an authorised investment fund, and

(b)on the distribution date for that distribution period the participant is within the charge to corporation tax.

(2) [F94Subject to paragraphs (2A)[F95, (2B) and (2BA)],] for the purpose of computing the corporation tax chargeable upon the participant, the unfranked part of the dividend distribution is treated—

(a)as an annual payment and not as a dividend distribution or an interest distribution; and

(b)as having been received by the participant after deduction of [F96tax at a rate equal to the basic rate of income tax] for the [F97tax year] in which the distribution date falls, from a corresponding gross amount.

[F98(2A) But paragraph (2) does not apply to a dividend distribution to which [F99Chapter 2 of Part 3 of CTA 2009] applies [F100unless the dividend distribution is made to—

(a)an insurance company in respect of any non-BLAGAB long-term business carried on by it, or

(b)an insurance special purpose vehicle that is not an insurance company in respect of any long-term business carried on by it that does not consist wholly of PHI business.

Expressions used in paragraph (a) or (b) have the same meaning as they have in Part 2 of FA 2012].

(2B) If, on the distribution date, the participant is the manager of the authorised investment fund, paragraph (2) shall not apply to the extent that the rights in respect of which the dividend distribution is made are held by him in the ordinary course of the manager’s business as manager of the fund.]

[F101(2BA)  Paragraph (2)(b) does not apply to so much of any dividend distribution as on a just and reasonable apportionment is attributable to an unallowable arrangement.

(2BB)  For the purposes of paragraph (2BA), an unallowable arrangement is an arrangement the main purpose or one of the main purposes of which is to secure that an amount of tax, or an increased amount of tax, is treated as deducted under paragraph (2)(b).

(2BC)  In paragraph (2BB), “arrangement” includes any arrangement, agreement, scheme, transaction, series of transactions or understanding (whether or not legally enforceable).]

[F102(2C) Regulation 48A makes provision in relation to the unfranked part of the dividend distribution treated as an annual payment under paragraph (2)(a) and regulation 48B makes provision in relation to the tax treated as deducted under paragraph (2)(b).]

(3) Regulation 49 explains how to calculate the unfranked part of the dividend distribution.

[F103(4) This regulation does not apply in respect of a holding in a qualified investor scheme if the scheme has not met the genuine diversity of ownership condition in regulation [F1049A] in relation to an accounting period.]

[F105Income treated as an annual payment treated as foreign incomeU.K.

48A.  If there is a foreign element of the tax treated as deducted under regulation 48(2)(b) (see regulation 48B), a corresponding proportionate part of the distribution which is treated as an annual payment under regulation 48(2)(a) is treated as if it were income that—

(a)arises in a territory of the kind mentioned in regulation 48B(3)(a), and

(b)is income by reference to which the tax treated under that provision as payable was computed.

Tax treated as deducted from a dividend distributionU.K.

48B.—(1) The tax treated as deducted under regulation 48(2)(b) (“the deemed deduction”) is treated as income tax.

(2) But paragraph (1) does not apply to any foreign element of the deemed deduction.

(3) Instead, for the purposes of the Tax Acts the foreign element of the deemed deduction is treated as if it were tax—

(a)payable under the law of a territory outside the United Kingdom with which there are not in force any arrangements under section 2(1) of TIOPA 2010 (double taxation relief by agreement),

(b)calculated by reference to income arising or any chargeable gain accruing, in the territory, and

(c)corresponding to United Kingdom corporation tax.

(4) The amount of the foreign element of the deemed deduction is the amount, if any, by which the participant’s portion of the legal owner’s liability to corporation tax in respect of the gross income is reduced by any relief which is given, or falls to be given by way of a credit under section 18 of TIOPA 2010 (entitlement to credit for foreign tax reduces UK tax by amount of the credit).

(5) For the purposes of paragraph (4) the participant’s portion shall be determined by reference to the proportions in which participants have rights in the authorised investment fund in the distribution period in question.]

Calculation of unfranked part of dividend distributionU.K.

49.—(1) This is how to calculate the unfranked part of the dividend distribution—

(2) In paragraph (1)—

• U = the unfranked part of the dividend distribution to the participant;

• A = the amount of the dividend distribution;

• [F106C = such amount of the gross income as derives from income in respect of which the legal owner is charged to corporation tax, as reduced by—

  (a)

  any amount carried forward from an earlier accounting period and allowed as a deduction in computing the legal owner’s liability to corporation tax for the accounting period in which the last day of the distribution period falls, and

  (b)

  an amount equal to the legal owner’s net liability to corporation tax in respect of the gross income.]

• D = the amount of the gross income, as reduced by an amount equal to the legal owner's net liability to corporation tax in respect of the gross income.

F107(2A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(3) Any reference in this regulation to the legal owner's net liability to corporation tax in respect of the gross income is a reference to the amount of the liability of the legal owner to corporation tax in respect of that gross income less the amount (if any) of any reduction of that liability which is given or falls to be given in accordance with any arrangements having effect by virtue of section 788 of ICTA (relief by agreement with other territories) or by way of a credit under section 790(1) of that Act (unilateral relief).

References to gross incomeU.K.

[F10850.  For the purposes of this Chapter, references to gross income are references to the net revenue before taxation determined in accordance with the Statement of Recommended Practice.]

[F109Participants chargeable to corporation tax: holdings in qualified investor schemes [F110and long-term asset funds] where scheme does not meet the genuine diversity of ownership conditionU.K.

51.—(1) This regulation applies if—

(a)a participant has a holding in a qualified investor scheme [F111or a long-term asset fund], and

(b)the scheme has not met the genuine diversity of ownership condition in regulation [F1129A] in relation to an accounting period.

(2) Section 212 of TCGA 1992 (annual deemed disposal of holdings of unit trusts etc.) does not apply to the participant in relation to that accounting period.

(3) Paragraph 4 of Schedule 10 to FA 1996 (company holdings in unit trusts and offshore funds) shall not apply to the participant in relation to that accounting period.]

Repayments of taxU.K.

F11352.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Companies carrying on general insurance business: treatment of certain amounts of tax as foreign taxU.K.

F11452A.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F115Diversely owned AIFs and financial traders: treatment of shares and unitsU.K.

52B.—(1) This regulation and regulation 52C apply if a financial trader has held, or holds, shares or units in a diversely owned AIF.

(2) In computing the trading profits or losses of the financial trader for the relevant period, the following amounts must be brought into account—

(a)all distributions received by or credited to the financial trader in respect of such shares or units for the relevant period; and

(b)any amount required to be brought into account under regulation 52C.

(3) In this regulation and in regulation 52D(2) references to distributions are subject to section 130 of CTA 2009 (insurers receiving distributions etc).

(4) In this regulation and in regulations 52C and 52D—

“relevant period” means—

“financial trader” has the meaning given by regulation 52E.

Financial traders: amounts to be brought into account in respect of shares or units held in diversely owned AIFsU.K.

52C.—(1)  The only amounts that are to be brought into account in computing the trading profits or losses in respect of the shares or units in the diversely owned AIF for the relevant period are—

(a)amounts that are brought into account in accordance with Cases 1 to 4, and

(b)amounts within regulation 52B(2)(a).

This is subject to section 130 of CTA 2009 (insurers receiving distributions etc) and regulation 52D.

(2) Case 1 applies if the financial trader held the shares or units in a diversely owned AIF at the beginning of the relevant period and holds those shares or units throughout that period.

Where Case 1 applies, the amount to be brought into account is the difference between the market value of the shares or units at the end of the immediately preceding relevant period and the market value of those shares or units at the end of the relevant period.

(3) Case 2 applies if a financial trader acquired shares or units in a diversely owned AIF during the relevant period and retains those shares or units throughout the relevant period.

Where Case 2 applies, the amount to be brought into account is the difference between the market value of the shares or units at the end of the relevant period and the acquisition cost of those shares or units.

(4) Case 3 applies if the financial trader held shares or units in a diversely owned AIF at the beginning of the relevant period and disposes of those shares or units during that period.

Where Case 3 applies the amount to be brought into account is the difference between the market value of the shares or units at the end of the immediately preceding relevant period and the disposal value of the shares or units.

(5) Case 4 applies if the financial trader acquires shares or units in a diversely owned AIF during the relevant period and disposes of those shares or units during that period.

Where Case 4 applies the amount to be brought into account is the difference between the acquisition cost of the shares or units and the disposal value of those shares or units.

(6) In this regulation—

“acquisition cost” means the value of the consideration given for the acquisition of the shares or units;

“disposal value” means the value of the consideration received for the disposal of the shares or units;

“market value” means—

Shares and units not within regulation 52CU.K.

52D.—(1)  Regulation 52C does not apply in respect of any shares or units in a diversely owned AIF in relation to which—

(a)conditions A and B are both satisfied, or

(b)condition C is satisfied.

(2) Condition A is that the shares or units in the diversely owned AIF form part of the financial trader’s stock in trade and all the profits and losses, including distributions, arising in relation to the shares or units in the diversely owned AIF are included in the computation of the financial trader’s trading profits for the relevant period.

(3) Condition B is that the shares or units in the diversely owned AIF are accounted for under generally accepted accounting practice on the basis of fair value accounting.

(4) Condition C is that the shares or units in the diversely owned AIF are a relevant holding in respect of which the provisions of section 490 of CTA 2009 apply in relation to the financial trader.

(5) In paragraph (4) “relevant holding” means—

(a)any rights under a unit trust scheme;

(b)a material interest in an offshore fund; or

(c)any shares in an open-ended investment company.

Meaning of financial traderU.K.

52E.—(1)  In regulations 52B, 52C and 52D “financial trader” means a person who is carrying on a business which is—

(a)a banking business,

(b)an insurance business, or

(c)a business consisting wholly or in part of dealing in trading assets such that any profit on such assets would form part of the trading profits of that business.

This paragraph is subject to paragraphs (2) and (3).

(2) “An insurance business” in paragraph (1)(b) does not include life assurance business carried on by an insurance company and in the event that such a company carries on both life assurance business and any other insurance business that company will not be a financial trader in respect of the life assurance business.

(3) If—

(a)a financial trader, “A”, directly or indirectly transfers trading assets to a diversely owned AIF under or as part of an arrangement which has an unallowable purpose, and

(b)a connected person, “B”—

(i)holds shares or units in that diversely owned AIF at the time of the transfer; or

(ii)directly or indirectly acquires shares or units in that diversely owned AIF at a later time,

B is treated as being a financial trader in relation to those shares or units.

(4) In paragraphs (1) and (3) “trading assets” means—

(a)stocks or shares;

(b)a relevant contract within regulation 14G;

(c)a loan relationship within regulation 14L;

(d)units in a collective investment scheme within regulation 14M;

(e)securities within regulation 14F;

(f)foreign currency; or

(g)a carbon emission trading product within regulation 14N,

a profit on the sale of which would form part of the trading profits of the financial trader.

(5) An arrangement includes any scheme, understanding or transaction of any kind, whether or not legally enforceable and whether involving a single transaction or two or more transactions.

(6) An arrangement has an unallowable purpose if the main purpose or one of the main purposes for either A or B being party to the arrangement is to obtain a tax advantage or an income tax advantage for any person.

(7) In paragraph (6)—

“tax advantage” has the meaning given by section of 840ZA of ICTA; and

“income tax advantage” has the meaning given by section 683 of ITA 2007.]

CHAPTER 4U.K.CHARGE TO TAX ON SUBSTANTIAL QIS HOLDINGS IN QUALIFIED INVESTOR SCHEMES

GeneralU.K.

Charge to tax under this ChapterU.K.

F11653.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of “substantial QIS holding”U.K.

F11654.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Amount charged to tax under this ChapterU.K.

F11655.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Measuring dates and meaning of “chargeable measuring date”U.K.

F11656.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

How tax is charged under this Chapter: income taxU.K.

F11657.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

How tax is charged under this Chapter: corporation taxU.K.

F11658.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Further provisionsU.K.

F11659.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The first measuring dateU.K.

The general ruleU.K.

F11660.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cases affected by the coming into force of these RegulationsU.K.

F11661.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cases involving the launch of qualified investor schemesU.K.

F11662.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Cases where a participant's holding becomes substantialU.K.

F11663.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Definition of the “first measuring date”U.K.

F11664.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Calculation to be made on the first measuring dateU.K.

F11665.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Disposals of holdingsU.K.

Reorganisations etc.U.K.

F11666.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Disposal of part of a substantial QIS holdingU.K.

F11667.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Disposal of the whole of a substantial QIS holdingU.K.

F11668.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

No gain/no loss disposalsU.K.

F11669.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[F117PART 4AU.K.PROPERTY AIFS

CHAPTER 1U.K.PRELIMINARY PROVISIONS

Property AIFsU.K.

69A.—(1) This Part enables an open-ended investment company which meets the conditions in regulations 69D to 69O—

(a)to benefit from the exemption from corporation tax in accordance with regulation 69Y(1), and

(b)to have liabilities to tax imposed on the company and on participants in accordance with Chapters 3, 4 and 5 of this Part.

(2) In these Regulations an open-ended investment company to which this Part applies may be referred to as a “Property AIF”.

Structure of this PartU.K.

69B.  The structure of this Part of these Regulations is as follows—

This Chapter contains preliminary provisions;

Chapter 2 deals with entry into and membership of the Property AIF regime;

Chapter 3 deals with the tax treatment of Property AIFs;

Chapter 4 deals with distributions made by Property AIFs;

Chapter 5 deals with the treatment of participants in Property AIFs;

Chapter 6 deals with compliance in relation to the Property AIF regime; and

Chapter 7 contains provisions relating to an open-ended investment company’s leaving the Property AIF regime.

Key conceptsU.K.

69C.—(1) In this Part “entry” means the time when this Part begins to apply to an open-ended investment company.

(2) In this Part “cessation” means the time when this Part ceases to apply to an open-ended investment company.

(3) In this Part, in relation to an open-ended investment company—

(a)“F (pre-entry)” means the open-ended investment company before this Part begins to apply to it,

(b)“F (tax-exempt)” means the open-ended investment company in so far as it carries on property investment business (within the meaning of regulation 69F) while this Part applies to it,

(c)“F (residual)” means the open-ended investment company in so far as it carries on business other than property investment business while this Part applies to it, and

(d)“F (post-cessation)” means the open-ended investment company after this Part has ceased to apply to it.

[F118(4) In this Part, a “dedicated feeder fund” in relation to a property AIF means a fund which—

(a)is a unit trust scheme;

(b)is dedicated to investment in the property AIF for which it is a feeder fund (in accordance with its prospectus); and

(c)holds at least 85% of its assets in the form of shares in that property AIF.]

CHAPTER 2U.K.ENTRY INTO AND MEMBERSHIP OF THE PROPERTY AIF REGIME

Conditions of membership of the Property AIF regimeU.K.

Conditions for this Part to apply to companyU.K.

69D.  In order for this Part to apply to an open-ended investment company in respect of an accounting period, the following conditions must be met—

(a)the property investment business condition (see regulation 69E);

(b)the genuine diversity of ownership condition (see regulation [F1199A]);

(c)the corporate ownership condition (see regulation 693K);

(d)the loan creditor condition (see regulation 694M);

(e)the balance of business conditions (see regulation 69N); and

(f)the notification condition (see regulation 69O).

Conditions for this Part to apply to a company where the company is also a qualified investor schemeU.K.

F12069DA.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The property investment business conditionU.K.

The property investment business conditionU.K.

69E.—(1) The property investment business condition is that the open-ended investment company must meet conditions A and B throughout the accounting period.

(2) Condition A is that the company’s instrument of incorporation and its prospectus F121... include a statement that the company’s investment objectives are—

(a)to carry on property investment business, and

(b)to manage cash raised from investors for investment in the property investment business.

(3) Condition B is that the company must carry on property investment business.

F122(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Meaning of “property investment business”U.K.

69F.—(1) In this Part “property investment business” means business consisting of any one or more of—

(a)property rental business (see regulation 69H);

(b)owning shares in UK-REITs; and

(c)owning shares or units in an entity [F123within section 528(4A)(j) of CTA 2010 (overseas equivalent to UK REIT)].

(2) In these Regulations “UK-REIT” [F124has the meaning given in section 518(4) of CTA 2010].

F125(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F125(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F125(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F125(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F126(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(8) This regulation is subject to the further provisions in regulation 69G.

Property investment business: further provisionsU.K.

69G.—(1) If an open-ended investment company to which this Part applies receives a distribution from a UK-REIT—

(a)the distribution is income of F (tax-exempt) to the extent that the distribution represents business of C (tax-exempt) carried on by the UK-REIT, and

(b)the distribution is income of F (residual) to the extent that the distribution represents business other than business of C (tax-exempt) carried on by the UK-REIT.

(2) In paragraph (1) “C (tax-exempt)” shall be construed in accordance with Part 4 of the Finance Act 2006.

(3) If an open-ended investment company to which this Part applies receives a distribution from an entity within regulation 69F(1)(c), the distribution is income of F (tax-exempt) except to the extent that the distribution is identified, at the time at which it is made, as arising from any activity of the entity that is not property rental business.

(4) For the purposes of this Part an asset is involved in property investment business if—

(a)it is an estate, interest or right in or over land by the exploitation of which property rental business is conducted;

(b)it consists of shares owned by the open-ended investment company in a UK-REIT; or

(c)it consists of shares [F127or units] owned by the open-ended investment company in an entity within regulation 69F(1)(c).

Meaning of “property rental business”U.K.

69H.—(1) In this Part “property rental business” means—

(a)property rental business within the meaning given by section 104 of FA 2006, and

(b)the relevant business of an intermediate holding vehicle (see regulation 69I).

(2) For the purposes of paragraph (1)(b) the relevant business of an intermediate holding vehicle is its property rental business within the meaning given by section 104 of FA 2006, but disregarding subsection (1)(a) of that section.

(3) For the purposes of this Part an asset is involved in property rental business if—

(a)it is an estate, interest or right in or over land by the exploitation of which property rental business is conducted, or

(b)it consists of shares owned by the open-ended investment company in an intermediate holding vehicle.

Meaning of “intermediate holding vehicle”U.K.

69I.—(1) For the purposes of regulation 69H, an entity is an “intermediate holding vehicle” in an accounting period if it meets conditions A to F throughout the accounting period.

(2) Condition A is that the vehicle is a company, trust or partnership.

(3) Condition B is that the vehicle is not a collective investment scheme.

(4) Condition C is that the vehicle is wholly owned by the open-ended investment company (the “parent”) or another intermediate holding vehicle or series of intermediate holding vehicles wholly owned by the parent, unless and to the extent that local legislation or regulations relating to the intermediate holding vehicle holding the property specified in paragraph (5) requires a proportion of local ownership.

(5) Condition D is that the function of the intermediate holding vehicle is solely to enable the holding, by the parent, of estates, interests or rights in or over land outside the United Kingdom by the exploitation of which property rental business is conducted.

(6) Condition E is that the intermediate holding vehicle has its accounts consolidated with those of the parent.

(7) Condition F is that all property rental income of the intermediate holding vehicle (or the full proportion of that income representing the interest of the parent in the intermediate holding vehicle) must be reflected in the distribution accounts of the parent at the same time as that income is reflected in the accounts of the intermediate holding vehicle.

The genuine diversity of ownership conditionU.K.

The genuine diversity of ownership conditionU.K.

F12869J.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

The corporate ownership conditionU.K.

The corporate ownership conditionU.K.

69K.—(1) The corporate ownership condition is that the open-ended investment company must meet conditions A to C and (if applicable) condition D at the time that this Part begins to apply to the company and throughout the accounting period.

This is subject to regulation 69L(1).

(2) Condition A is that no body corporate is beneficially entitled (directly or indirectly) to 10% or more of the net asset value of the fund.

(3) Condition A is treated as met if—

(a)the company has taken reasonable steps to prevent a body corporate from acquiring a holding of 10% or more of the net asset value of the fund,

(b)a body corporate has nevertheless acquired such a holding,

(c)immediately upon becoming aware of the situation, the company has taken steps to ensure that the holding is reduced below 10% of the net asset value of the fund, and

(d)the company has continued, with all reasonable speed, to take steps to ensure that the holding is so reduced.

(4) Condition B is that the company’s instrument of incorporation and its prospectus include provisions under which any body corporate which becomes a [F129participant] in the company—

(a)must undertake not to acquire 10% or more of the share capital of the company, and

(b)must undertake, on becoming aware that it has acquired 10% or more of the share capital of the company, to reduce its holding of that share capital below 10%.

(5) Condition C is that the company’s instrument of incorporation and its prospectus include provisions under which a body corporate acquiring shares in the company must give a certificate in accordance with paragraph (6) or (7).

(6) The certificate is a certificate that the body corporate acquiring shares holds the shares as beneficial owner.

(7) The certificate is a certificate that the body corporate acquiring shares holds some or all of those shares otherwise than as a beneficial owner, but that the body corporate—

(a)holds less than 10% of the share capital of the company on behalf of itself or any one other corporate beneficial owner, and

(b)has obtained the undertakings in the terms specified in sub-paragraphs (a) and (b) of paragraph (4) from every other body corporate on whose behalf it owns shares in the company otherwise than as a beneficial owner.

(8) Condition D is that, in a case in which the body corporate acquiring shares in the company gives a certificate in accordance with paragraph (7), the body corporate acquiring the shares has undertaken to disclose the following information to the manager of the company if the manager so requires—

(a)the names of any body corporate on whose behalf the body corporate owns shares in the company otherwise than as a beneficial owner, and

(b)the extent of the holding of that body corporate in the company.

The corporate ownership condition: further provisionsU.K.

69L.—(1) The open-ended investment company meets conditions B and C of the corporate ownership condition if it provides in its instrument of incorporation and its prospectus that a body corporate is prohibited from acquiring shares in the open-ended investment company.

(2) The open-ended investment company meets conditions B and C of the corporate ownership condition if—

(a)it provides in its instrument of incorporation and its prospectus that a body corporate is prohibited from acquiring shares [F130as a participant] in the open-ended investment company,

(b)a body corporate (“BC”) acquires shares in the open-ended investment company,

(c)BC does not hold those shares as beneficial owner, and

(d)BC gives a certificate in accordance with paragraph (3).

(3) The certificate is a certificate—

(a)that BC does not hold any of the shares in the open-ended investment company as beneficial owner, and

(b)that none of the beneficial owners of BC’s shares in the open-ended investment company is a body corporate.

(4) Paragraph (5) applies if the trustees of a unit trust scheme—

(a)hold shares in the open-ended investment company, and

(b)are chargeable, in the United Kingdom, either to income tax or to corporation tax in their capacity as trustees of that unit trust scheme.

(5) For the purposes of regulation 69K [F131the unit trust scheme is treated] as the beneficial owners of the shares; and a person holding units in the unit trust shall not be treated as beneficially entitled (directly or indirectly) to 10% or more of the net asset value of the open-ended investment company’s fund by virtue of holding the units.

(6) In this Part “body corporate” means—

(a)a body corporate incorporated under the laws of any part of the United Kingdom or any other territory, or

(b)an entity which is treated as a body corporate for tax purposes—

(i)in accordance with the law of a territory outside the United Kingdom with which relevant arrangements have been entered into, or

(ii)in accordance with an international agreement containing relevant arrangements.

(7) In paragraph (6) “relevant arrangements” means arrangements which—

(a)have been entered into with a view to affording relief from double taxation, and

(b)have effect by virtue of an Order in Council under section 788 of ICTA.

The loan creditor conditionU.K.

The loan creditor conditionU.K.

69M.—(1) The loan creditor condition is that the open-ended investment company must meet conditions A to C throughout the accounting period in the case of any loan relationship to which the company is party as debtor.

(2) Condition A is that, in the case of a debtor relationship of the company, the person standing in the position of a creditor as respects the debt in question is not entitled to an amount by way of interest which depends to any extent on—

(a)the results of all or part of the open-ended investment company’s business, or

(b)the value of any of the company’s assets.

(3) For the purposes of condition A, a loan shall not be treated as dependent on the results of the company’s business by reason only that the terms of the loan provide—

(a)for the interest to be reduced in the event of results improving, or

(b)for the interest to be increased in the event of results deteriorating.

(4) Condition B is that, in the case of a debtor relationship of the company, the person standing in the position of a creditor as respects the debt in question is not entitled to an amount by way of interest which exceeds a reasonable commercial return on the consideration lent.

(5) Condition C is that, in the case of a debtor relationship of the company, the person standing in the position of a creditor as respects the debt in question is entitled on repayment to an amount which—

(a)does not exceed the consideration lent, or

(b)is reasonably comparable with the amount generally repayable (in respect of an equal amount of consideration) under the terms of issue of securities listed on a recognised stock exchange.

(6) In this regulation “loan relationship” and “debtor relationship” shall be construed in accordance with Chapter 2 of Part 4 of FA 1996 (loan relationships).

The balance of business conditionsU.K.

The balance of business conditionsU.K.

69N.—(1) The balance of business conditions are that conditions A and B must be met.

(2) Condition A is that the net income of F (tax-exempt) for an accounting period (determined in accordance with regulation 69Z1) is—

(a)at least 40% of the open-ended investment company’s net income (as defined in regulation 69Z) where this Part applies to a newly qualified company in its first accounting period, or

(b)at least 60% of the open-ended investment company’s net income (as defined in regulation 69Z) where this Part applies to a company in an accounting period in any other circumstances.

(3) Condition B is that the value of the assets involved in property investment business is—

(a)at least 40% of the total value of the assets held by the open-ended investment company at the end of the accounting period where this Part applies to a newly qualified company in its first accounting period, or

(b)at least 60% of the total value of the assets held by the open-ended investment company at the end of the accounting period where this Part applies to a company in an accounting period in any other circumstances.

(4) For the purposes of condition B—

(a)assets must be valued in accordance with generally accepted accounting practice,

(b)where generally accepted accounting practice offers a choice of valuation between cost basis and fair value, fair value must be used, and

(c)no account shall be taken of liabilities secured against or otherwise relating to assets (whether generally or specifically).

(5) In this Part a “newly qualified company” means a company—

(a)to which this Part applies immediately upon its authorisation, and

(b)which has not been an authorised investment fund before that authorisation.

The notification conditionU.K.

The notification conditionU.K.

69O.—(1) The notification condition is that conditions A and B must be met.

(2) Condition A is—

(a)that the manager of an existing open-ended investment company has given notice for this Part to apply to the company, or

(b)if it is proposed to incorporate an open-ended investment company, that the person expected to become the manager of the open-ended investment company on its incorporation (the “applicant”) has given notice for this Part to apply to the company.

(3) Condition B is that the notice given under paragraph (2) has taken effect.

(4) If notice is given under paragraph (2)(a), the company must obtain any necessary shareholder and regulatory approvals to its instrument of incorporation and prospectus before giving the notice.

(5) If notice is given under paragraph (2)(b), the terms of the proposed company’s instrument of incorporation must be such that the proposed company, on its incorporation, will be required to meet—

(a)the property investment business condition (see regulation 69E), and

(b)the genuine diversity of ownership condition (see regulation [F1329A]).

(6) In this Part—

the “applicant” means the person referred to in paragraph (2)(b),

an “existing company notice” means a notice given under paragraph (2)(a), and

a “future company notice” means a notice given under paragraph (2)(b).

Form and timing of notice under regulation 69OU.K.

69P.—(1) A notice under regulation 69O must be given in writing to the Commissioners.

(2) An existing company notice must be given at least 28 days before the beginning of the specified period.

This is subject to the following paragraphs of this regulation.

(3) A future company notice must be given at least 42 days before the date of the expected incorporation and authorisation.

This is subject to the following paragraphs of this regulation.

(4) A notice under regulation 69O may be withdrawn or amended at any time before it takes effect—

(a)by the manager (in the case of an existing company notice), or

(b)by the applicant (in the case of a future company notice).

(5) If a notice under regulation 69O is amended before it is due to take effect, regulation 69O shall apply to the amended notice.

(6) But if HM Revenue and Customs give notice that they are satisfied that the amended notice is valid, the amended notice shall take effect as if given on the date of the original notice.

(7) An existing company notice may be given at any time before the beginning of the specified period if—

(a)HM Revenue and Customs have given clearance under regulation [F1339B], and

(b)the manager of the open-ended investment company certifies that there have been no changes in substance between—

(i)the form in which the company’s instrument of incorporation and its prospectus were considered by HM Revenue and Customs before giving the clearance, and

(ii)the form in which it is proposed that those documents will apply at the beginning of the specified period.

(8) A future company notice may be given at any time before the proposed company is authorised and incorporated if—

(a)HM Revenue and Customs have given clearance under regulation [F1349B], and

(b)the applicant certifies that there have been no changes in substance between—

(i)the form in which the proposed company’s instrument of incorporation and its prospectus were considered by HM Revenue and Customs before giving the clearance, and

(ii)the form in which it is proposed that those documents will apply at the time when the proposed company is authorised.

Contents of notice under regulation 69OU.K.

69Q.—(1) This regulation applies if notice is given under regulation 69O.

(2) An existing company notice must specify the accounting period from the beginning of which this Part is to apply to the company (the “specified accounting period”).

(3) An existing company notice must be accompanied by—

(a)a statement by the manager of the open-ended investment company that the conditions specified [F135regulation 9A and] in regulations 69E to 69N are reasonably expected to be met in respect of the company throughout the specified accounting period;

(b)the following documents relating to the company—

(i)its instrument of incorporation, and

(ii)its prospectus;

(c)a copy of the application to the [F136appropriate regulator] for agreement to changes in the company’s instrument of incorporation and its prospectus; and

(d)copies of any documents accompanying the application mentioned in sub-paragraph (c) to the extent that those documents do not fall within sub-paragraphs (a) and (b).

(4) A future company notice must specify that this Part will apply to the proposed company from the date of its incorporation and authorisation.

(5) A future company notice must be accompanied by—

(a)a statement by the applicant that the conditions specified in [F137regulation 9A and] regulations 69E to 69N are reasonably expected to be met in respect of the proposed company throughout its first accounting period;

(b)the following documents relating to the proposed company—

(i)its proposed instrument of incorporation, and

(ii)its F138... prospectus F139... ;

(c)a copy of the application to the [F140appropriate regulator] for approval of the proposed company as an open-ended investment company; and

(d)copies of any documents accompanying the application mentioned in sub-paragraph (c) to the extent that those documents do not fall within sub-paragraphs (a) and (b).

Procedural matters relating to the giving of notice for this Part to applyU.K.

Notice: further provisions: quashing noticesU.K.

69R.—(1) This regulation applies if any of conditions A to C are met.

(2) Condition A is that an existing company notice is given, but the notice is not accompanied by the documents specified in regulation 69Q(3)(b).

(3) Condition B is that a future company notice is given, but the notice is not accompanied by the documents specified in regulation 69Q(5)(b).

(4) Condition C is that a person gives a notice under regulation 69O in circumstances where the documents supplied do not demonstrate that the open-ended investment company (or the proposed open-ended investment company) will meet all the conditions of membership of the Property AIF regime.

(5) HM Revenue and Customs may give a notice (a “quashing notice”) quashing the notice given under regulation 69O—

(a)to the manager of the open-ended investment company if an existing company notice has been given, or

(b)to the applicant if a future company notice has been given.

Procedure relating to quashing noticesU.K.

69S.—(1) HM Revenue and Customs must not give a quashing notice until—

(a)they have given a notice (a “preliminary notice”) to the person giving the notice under regulation 69O specifying the reasons why the preliminary notice is given, and

(b)they have given the person giving the notice under regulation 69O a period of 28 days to rectify the matters specified in the preliminary notice.

Paragraph (1)(b) is subject to paragraphs (7) to (9).

(2) HM Revenue and Customs must give a preliminary notice within a period of 28 days beginning with the day on which they receive the notice given under regulation 69O.

(3) HM Revenue and Customs must—

(a)give a quashing notice, or

(b)give notice to the manager of the open-ended investment company or to the applicant (as the case may be) that they are satisfied that the matters specified in the preliminary notice have been rectified,

within a period of 28 days beginning on the day specified in paragraph (4).

(4) The day specified is whichever is the earlier to occur of—

(a)the day immediately following the expiry of the period specified in the preliminary notice, and

(b)the day on which HM Revenue and Customs receive notice from the manager of the open-ended investment company or from the applicant (as the case may be) that the manager or applicant thinks—

(i)that the matters specified in the preliminary notice have been rectified, or

(ii)that the original notice given under regulation 69O is valid.

(5) If HM Revenue and Customs give a preliminary notice, the open-ended investment company (or, as the case may be, the proposed open-ended investment company) in respect of which the notice is given may not enter the Property AIF regime until HM Revenue and Customs have notified the manager of the company (or, as the case may be, the applicant) that they are satisfied that the matters specified in the preliminary notice have been rectified.

(6) If HM Revenue and Customs give a quashing notice, and the person to whom the notice is given appeals, the open-ended investment company (or, as the case may be, the proposed open-ended investment company) in respect of which the notice is given may not enter the Property AIF regime until the appeal is determined.

(7) The period of 28 days mentioned in paragraph (1)(b) is replaced by the period referred to in paragraph (9) if, within that 28 day period, the conditions specified in paragraph (8) are met.

(8) The conditions are that—

(a)HM Revenue and Customs and the applicant are in agreement as to the changes needed to the notice or to the documents accompanying the notice (or to both),

(b)the applicant has given notice to HM Revenue and Customs stating that the changes referred to in sub-paragraph (a) will take a specified period (which is longer than 28 days) to effect, and

(c)HM Revenue and Customs have given notice to the applicant accepting the statement made in the notice given under sub-paragraph (b).

(9) The period is the specified period mentioned in paragraph (8)(b).

Appeal against quashing noticeU.K.

69T.—(1) A person to whom a quashing notice is given may appeal F141....

(2) The notice of appeal must be given to HM Revenue and Customs within a period of 28 days beginning with the day on which the quashing notice is given.

(3) On an appeal [F142that is notified to the tribunal, the tribunal] shall determine whether it was just and reasonable for HM Revenue and Customs to give the quashing notice.

(4) If the [F143tribunal allows] the appeal—

(a)[F144the tribunal may] direct that this Part shall apply to the open-ended investment company (or, as the case may be to the proposed open-ended investment company), and

(b)[F144the tribunal may] specify the date from which this Part shall so apply.

(5) The date mentioned in paragraph (4)(b)—

(a)must not be earlier than the beginning of the specified accounting period if an existing company notice has been given, and

(b)must not be earlier than the date of incorporation and authorisation if a future company notice has been given.

Clearance applicationsU.K.

Clearance in relation to the genuine diversity of ownership conditionU.K.

F14569U.  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consequences of entryU.K.

Effects of entryU.K.

69V.—(1) Property rental business of F (pre-entry) shall be treated for the purposes of corporation tax as ceasing at entry.

(2) Assets which immediately before entry are involved in property rental business of F (pre-entry) shall be treated for the purposes of corporation tax as being sold by F (pre-entry) immediately before entry and reacquired by F (tax-exempt) immediately after entry.

(3) For the purposes of corporation tax, on entry one accounting period of the open-ended investment company shall end and another shall begin.

(4) On entry a new distribution period of the open-ended investment company shall begin.

(5) The sale and reacquisition deemed under paragraph (2) shall not have effect for the purposes of tax in respect of chargeable gains.

(6) For the purposes of CAA 2001, the sale and reacquisition deemed under paragraph (2)—

(a)shall not give rise to allowances or charges, and

(b)shall not make it possible to make an election under section 198 or 199 of that Act (apportionment).

(7) For the purposes of CAA 2001, anything done by or to F (pre-entry) before entry in relation to an asset which is deemed under paragraph (2) to be sold and reacquired shall be treated after entry as having been done by or to F (tax-exempt).

DurationU.K.

69W.  Once this Part has begun to apply to an open-ended investment company it shall continue to apply unless and until it ceases to apply in accordance with Chapter 7 of this Part.

CHAPTER 3U.K.THE TAX TREATMENT OF PROPERTY AIFS

Categories of businessU.K.

Ring-fencing of tax-exempt businessU.K.

69X.—(1) For the purposes of corporation tax, the business of F (tax-exempt) shall be treated as a separate business (distinct from—

(a)any business carried on by F (pre-entry),

(b)any business carried on by F (residual), and

(c)any business carried on by F (post-cessation)).

(2) For the purposes of corporation tax, F (tax-exempt) shall be treated as a separate company (distinct from—

(a)F (pre-entry),

(b)F (residual), and

(c)F (post-cessation)).

(3) In particular—

(a)a loss incurred by F (tax-exempt) may not be set off against the net income of F (residual),

(b)a loss incurred in respect of F (residual) may not be set off against the net income of F (tax exempt),

(c)a loss incurred in respect of F (pre-entry) may not be set off against the net income of F (tax-exempt) (but this regulation does not prevent a loss of that kind from being set off against profits of F (residual)),

(d)a loss incurred by F (tax-exempt) may not be set off against profits arising to F (post-cessation) (in respect of business of any kind), and

(e)receipts accruing after entry but relating to business of F (pre-entry) shall not be treated as receipts of F (tax-exempt).

(4) In paragraph (3) a reference to a loss includes a reference to a deficit, expense, charge or allowance.

(5) Section 392B of ICTA (ring-fencing of losses from overseas property business) shall not apply to business of F (tax-exempt).

(6) Paragraphs 5B and 5C of Schedule 28AA to ICTA (transfer pricing: exemption for small and medium enterprises) shall not apply to an open-ended investment company to which this Part applies (whether to F (tax-exempt) or to F (residual)).

Chargeability to taxU.K.

Chargeability to corporation taxU.K.

69Y.—(1) The net income of F (tax-exempt) (see regulation 69Z1) shall not be charged to corporation tax.

(2) The net income of F (residual) (see regulation 69Z3) shall be charged to corporation tax at the rate applicable for open-ended investment companies (see section 468A(1) of ICTA).

Meaning of “net income”U.K.

69Z.—(1) In this Part the “net income” of an open-ended investment company for an accounting period means, in the case of an open-ended investment company that prepares accounts in accordance with UK generally accepted accounting practice, the amount falling to be dealt with under the heading [F146net revenue/(expense) before taxation] in the company’s statement of total return for the accounting period.

(2) In paragraph (1) “the company’s statement of total return for the accounting period” is to be construed in accordance with regulation 12.

Calculation of net income of F (tax-exempt)U.K.

69Z1.—(1) This regulation applies to determine the net income of F (tax-exempt) for the purposes of this Part.

(2) Section 21A of ICTA (calculation of profits of Schedule A business) shall apply to income arising from the business of F (tax-exempt).

(3) Paragraph 2(3) of section 15(1) of ICTA (Schedule A: disregard of credits and debits from loan relationships and derivative contracts) shall not apply in respect of—

(a)a loan relationship if or in so far as it relates to tax-exempt business,

(b)a hedging derivative contract if or in so far as it relates to tax-exempt business, or

(c)embedded derivatives if or in so far as the host contract is entered into for the purposes of tax-exempt business.

(4) For the purposes of paragraph (3)—

(a)a derivative contract is hedging in relation to a company if or in so far as it is acquired as a hedge of risk in relation to an asset by the exploitation of which tax-exempt business is conducted,

(b)a derivative contract is hedging in relation to a company if or in so far as it is acquired as a hedge of risk in relation to a liability incurred in connection with tax-exempt business,

(c)a designation of a contract as wholly or partly hedging for the purposes of a company’s accounts shall be conclusive, and

(d)“embedded derivatives” and “host contract” shall be construed—

(i)in accordance with section 94A of FA 1996 in relation to loan contracts with embedded derivatives,

(ii)in accordance with paragraph 2A of Schedule 26 to FA 2002 in relation to non-financial contracts with embedded derivatives,

(iii)in accordance with paragraph 2B of Schedule 26 to FA 2002 in relation to hybrid derivatives.

(5) In paragraph (4)(a) the reference to an asset includes a reference to—

(a)the value of an asset, and

(b)profits attributable to it.

(6) Net income shall be computed without regard to items giving rise to credits or debits which would be within Schedule 26 to FA 2002 (derivative contracts) but for paragraph 4(2)(b) of that Schedule (exclusion of share-based and unit-trust-based contracts).

(7) Income and expenditure relating partly to tax-exempt business and partly to non-tax-exempt business shall be apportioned reasonably.

(8) Section 3(1) of CAA 2001 (claims for capital allowances) shall not apply; and any allowance which the company could claim under that section shall be made automatically and reflected in the calculation of net income.

Components of income arising to F (residual)U.K.

69Z2.—(1) For the purposes of this Part the income arising to F (residual) consists of—

(a)distributions qualifying for exemption under section 208 of ICTA, and

(b)income arising from the business of F (residual).

(2) Section 21A of ICTA (calculation of profits of Schedule A business) shall apply to income arising from the business of F (residual) if and to the extent that income arising from the business of F (residual) is chargeable to corporation tax under Schedule A.

Calculation of net income of F (residual)U.K.

69Z3.  Use this regulation to determine the net income of F (residual) for the purposes of this Part.

First rule

Determine the amount of the income arising to F (residual).

Second rule

Deduct any amounts whose deduction is required or allowed under the Corporation Tax Acts (including any distributions qualifying for exemption under section 208 of ICTA).

In this Part the amount so found is called the “pre-distribution amount”.

Third rule

Deduct the amount attributed to PAIF distributions (interest) under regulation 69Z14(b).

The result is the net income of F (residual).

Breaches of conditionsU.K.

Breach of the genuine diversity of ownership conditionU.K.

69Z4.—(1) This regulation applies if an open-ended investment company to which this Part applies is in breach of the genuine diversity of ownership condition.

(2) Within 28 days of becoming aware of the breach, the company must provide the following information to the Commissioners—

(a)the date on which the condition first ceased to be met;

(b)the date on which the company became aware of the breach;

(c)details of the condition that was breached;

(d)the nature of the breach;

(e)the steps the company proposes to take to rectify the breach; and

(f)the date by which the company proposes to rectify the breach.

(3) The date referred to in paragraph (2)(f) must be the earliest date by which the objective of complying with the genuine diversity of ownership condition may reasonably be achieved.

(4) The Commissioners may give a termination notice to the company if—

(a)the steps that the company proposes to take will not rectify the breach, or

(b)the date by which the company proposes to rectify the breach is not the earliest date by which the objective of remedying the genuine diversity ownership condition may reasonably be achieved.

(5) If there are three different breaches of the genuine diversity of ownership condition in three different accounting periods in a period of ten years beginning with the first day of the accounting period in which the company becomes aware of the first of those breaches, the Commissioners may give a termination notice to the company.

Breach of the corporate ownership conditionU.K.

69Z5.—(1) This regulation applies if an open-ended investment company to which this Part applies is in breach of the corporate ownership condition.

(2) If there is a breach which is caused by the action of a shareholder in the company and the company has not taken reasonable steps to prevent the breach (so that, accordingly, there is a charge to corporation tax under regulation 69Z12) (a “specified breach”), this Part shall continue to apply to the company despite the breach (but see paragraph (3) and regulation 69Z8).

(3) If there are three specified breaches in a period of ten years beginning with the first day of the accounting period in which the first specified breach occurs, the Commissioners may give a termination notice to the company.

Breach of the loan creditor conditionU.K.

69Z6.—(1) This regulation applies if an open-ended investment company to which this Part applies is in breach of the loan creditor condition.

(2) If the company is inadvertently in breach of the loan creditor condition but rectifies the breach within a period of 28 days beginning with the day on which the company first becomes aware of the breach, this Part shall continue to apply to the company despite the breach (but see paragraphs (5) and (6) and regulation 69Z8).

(3) If the company is inadvertently in breach of the loan creditor condition but does not rectify the breach within a period of 28 days beginning with the day on which the company first becomes aware of the breach, the Commissioners may give a termination notice to the company.

(4) If the company is intentionally or negligently in breach of the loan creditor condition, the Commissioners may give a termination notice to the company.

(5) If the company is in breach of the same condition specified in paragraphs (2) to (5) of regulation 69M in two different accounting periods in a period of ten years beginning with the first day of the accounting period in which the company becomes aware of the first of those breaches, the Commissioners may give a termination notice to the company.

(6) If the company is in breach of the conditions specified in paragraphs (2) to (5) of regulation 69M in three different accounting periods in a period of ten years beginning with the first day of the accounting period in which the company becomes aware of the first of those breaches, the Commissioners may give a termination notice to the company.

Breach of balance of business conditionsU.K.

69Z7.—(1) Paragraph (2) applies if a newly qualified company—

(a)is in breach of condition A set out in regulation 69N(2)(a) in its first accounting period, or

(b)is in breach of condition B set out in regulation 69N(3)(a) at the end of its first accounting period.

(2) This Part shall cease to apply to the company at the end of its first accounting period and regulation 69Z41 shall apply.

(3) Paragraphs (4) to (7) apply if an open-ended-investment company to which this Part applies—

(a)is in breach of condition A set out in regulation 69N(2)(b) in an accounting period, or

(b)is in breach of condition B set out in regulation 69N(3)(b) at the end of an accounting period.

(4) If the conditions specified in paragraph (6) are met, this Part shall continue to apply to the company despite the breach (but see paragraph (7) and regulation 69Z8).

(5) If the conditions specified in paragraph (6) are not met, the Commissioners may give a termination notice to the company.

(6) The conditions are that—

(a)property investment business is at least 50% of the company’s net income in the accounting period,

(b)the value of the assets involved in property investment business is at least 50% of the total value of assets held by the company at the end of the accounting period.

(7) If this regulation applies to a company in three different accounting periods in a period of ten years beginning with the first day of the accounting period in which the company becomes aware of the first of those breaches, the Commissioners may give a termination notice to the company.

Multiple breaches of separate conditionsU.K.

69Z8.—(1) This regulation applies in relation to an open-ended investment company to which this Part applies if—

(a)there has been a breach of at least two of the conditions in [F147regulation 9A or] regulations 69E to 69N,

(b)at least one of the conditions breached is contained in a different regulation from that containing another of those breached, and

(c)there have been five breaches in a period of ten years beginning with the first day of the accounting period in which the first breach occurs.

(2) The Commissioners may give a termination notice to the company.

Further provisionsU.K.

Profit/financing costs in the case of a Property AIF that is a qualified investor schemeU.K.

69Z9.—(1) This regulation applies if conditions A and B are met.

(2) Condition A is that an open-ended investment company to which this Part applies is a qualified investor scheme.

(3) Condition B is that the result of the following calculation is less than 1.25 in respect of an accounting period—

(4) In paragraph (3)—

“Income” means the amount of the net income of F (tax-exempt) arising in the accounting period (before the offset of capital allowances, of losses from a previous accounting period, and of amounts taken into account under regulation 69Z1(3)), and

“Financing Costs” means the amount of the financing costs incurred in that period in respect of the business of F (tax-exempt).

(5) An amount shall be charged to corporation tax.

(6) That amount is determined as follows—

• Step One

  Determine the financing costs which, given the actual income, would produce the result of 1.25 in the calculation specified in paragraph (3) (the “theoretical financing costs”).

• Step Two

  Determine the amount by which the actual financing costs exceed the theoretical financing costs (“the excess financing cost”).

• Step Three

  Divide the main rate at which corporation tax is charged for the accounting period by the rate at which corporation tax is charged on an open-ended investment company for the accounting period (see section 468A(1) of ICTA) to determine the multiplier.

• Step Four

  Multiply the excess financing cost by the multiplier.

The result is the amount charged to tax.

(7) For the purposes of paragraphs (3) and (4) “financing costs” are the costs of debt finance; and in calculating the costs of debt finance in respect of an accounting period the matters to be taken into account include—

(a)costs giving rise to debits in respect of debtor relationships of the company under Chapter 2 of Part 4 of FA 1996 (loan relationships), other than debits in respect of exchange losses from such relationships (within the meaning of section 103(1A) and (1B) of that Act),