Daniel Parry, Managing Director
Jordan Brown, Senior Director
Charlotte Walker, Manager
Jason Clatworthy, Managing Director
Adam Benson, Managing Director
Kevin M. Jacobs, Managing Director
April 26, 2021 / North America
For many years, the Cayman Islands, Guernsey, and Jersey have been the jurisdictions of choice for U.S. investment fund managers organizing feeder vehicles or investment funds for making offshore investments, including into the European Union (EU). However, the previously overlooked jurisdiction of Scotland is rising in prominence in the marketplace due to the global focus on environment, social and corporate governance (ESG); the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting project; and the European Commission’s Anti-Tax Avoidance Package, which included the Cayman Islands on its “tax haven blacklist” until October 2020. This alert highlights the potential benefits of often-overlooked Scottish limited partnerships (SLP).
What is an SLP?
An SLP is a limited partnership that has its own separate legal personality, distinct from those of its partners. Therefore, unlike, for example, an English limited partnership, an SLP can own assets in its own name. This is important because an SLP can be used as a feeder vehicle that can be admitted and registered as a single entity with the underlying fund.
Corporate Benefits of an SLP
One of the key benefits of establishing an SLP is its simplicity to set up. Unlike other jurisdictions, establishing an SLP is relatively simple and does not require any pre-clearance from United Kingdom (U.K.) authorities. In fact, an SLP can usually be set up with a Limited Partnership Agreement and other documents substantially similar to those used to set up Delaware, Cayman Islands, Guernsey, and Jersey limited partnerships. Additionally, the costs of operating an SLP are generally lower than in other jurisdictions as the principal requirement for an SLP is that its business is undertaken with a view to making a profit. In other words, there are few, if any, limitations on the SLP’s constitutional and operational rules. The SLP is also highly versatile in that it can be used as a primary fund vehicle, or as a carried interest or feeder fund.
Tax Benefits of an SLP
An SLP is fiscally transparent for U.K. taxation purposes with no U.K. tax payable by the SLP itself and potentially no U.K. tax liability or filing requirement for the SLP’s non-U.K.-resident limited partners. Additionally, for VAT purposes, an SLP should not be considered to be carrying out an economic activity and, therefore, should not be required to be VAT registered. Similarly, an SLP should not be able to recover VAT incurred on any purchases. Lastly, a U.S. “check-the-box” election can be made to treat an SLP as opaque for U.S. taxation purposes.
Implications of Brexit
Although Brexit officially began in January 2020, there are still uncertainties surrounding the future interactions of the U.K. and the EU. In light of that uncertainty, we would be remiss not to acknowledge that based on a fund’s particular facts, Luxembourg may be a more desirable jurisdiction than Scotland in the short term for EU-based investors. However, even this limitation could change if either:
(i) The U.K. and the EU agree to a passporting regime – or if the U.K. and an individual EU Member State agree to a national private placement regime – which should enable U.K. based alternative investment fund managers, including those within an SLP, to market their funds to potential investors based within the EU, or the specific EU Member State; or
(ii) A referendum on Scottish independence from the U.K. results in Scotland leaving the U.K. and subsequently joining the EU.
There are several factors that fund managers consider when choosing a jurisdiction in which to organize fund entities. Due to an evolving economic climate, a tide of change is coming and as a result of which, fund managers are being asked to choose the jurisdictions in which entities reside, rather than simply continuing to use the same familiar foreign jurisdictions as in the past. Scotland, and in particular SLPs, offer many of the benefits that fund managers desire when determining where to set up their fund or feeder vehicle. Additionally, although they have been delayed due to COVID, several changes may be coming that would make Scotland an even more desirable jurisdiction (including, for example, the Moveable Transactions (Scotland) Act, which is currently in bill form). The U.K. offices of A&M, and in particular our newly established office in Glasgow, have the experience and expertise to help fund managers choose the correct jurisdiction, whether it be Scotland or somewhere else. Please contact your trusted A&M Taxand adviser if you have any questions regarding your fund structure, including the potential use of an SLP.