Updated guidance in relation to the new Qualifying Asset Holding Company (QAHC), which was launched in April this year, has just been published at IFM40260. Amongst other things, the guidance provides a timely boost to the potential use of QAHCs by credit funds in the context of loan origination strategies.
The new HMRC guidance sets out further commentary and some specific illustrative examples as to how the key activity test will be applied to certain facts, including loan origination activity (and in particular whether it is an allowable investment activity or a prohibited trading activity).
As a general statement, holding assets (including debt instruments) for the medium to long term will likely be seen as investment activity assuming there is not generally a high turnover of assets or large number of transactions which the company undertakes. What is key here is the intention of the company upon acquisition of the assets, and so contemporaneous evidence of that intention (for example, company board minutes) would be appropriate. This then would likely mean that the investment activity is continuing even if assets are sold sooner than originally intended. No clear boundary has been given as to what is considered to be medium to long term and this will depend to some extent on the particular strategy of the fund/company. However, weeks or months is stated to be short term and therefore indicative of a trading activity whereas several years is stated to be indicative of medium to long term and accordingly of an investment activity.
Another example in the HMRC guidance expressly envisages that fees received in conjunction with loan origination activity (such as origination, participation, documentation or consent fees) may, where the originated loans (or a significant portion of them) are held as a part of an investment strategy, form part of the investment return alongside portfolio investment income. In addition, the activity of loan origination would not itself be considered to be a trading activity or an indication that the company is trading. Again, what is key is the intention as to whether originated loans would continue to be held for the medium to long term.
In contrast, syndication fees or arranging loans for others to hold is likely be regarded as the result of a trading activity unless the quantum of such syndication fees are such so as to indicate that the activity is not carried on to a substantial extent.
A further illustrative example is also provided in the HMRC guidance with respect to a strategy of investing in distressed debt. Again, if the company intends to hold the debt for the medium to long term, then this is likely to constitute an investment activity even if opportunities are taken to sell down the debt or participate in a debt restructuring or insolvency activity prior to the maturity of the debt. However, where the company leads a restructuring or insolvency process it may result in the activity constituting a trading activity. Whether this proves to be the case will depend upon why the QAHC is leading the process and whether it is receiving material fees for doing so. In addition, constantly renewing the book of distressed assets may give rise to the conclusion that the activity is a trading activity. In contrast, further parts of the guidance helpfully illustrate that where debt is converted into equity in the debtor company as part of a restructuring and the equity then continues to be held by the company for the medium to long term this should be viewed as an investment activity.
Ultimately, while there is still a need to make a case-by-case assessment as to whether a given debt or loan origination strategy is or is not going to be an allowable investment activity, the new illustrative guidance provides the basis for a more robust conclusion that many common scenarios will likely be able to be safely conducted by a QAHC. Given this and in the light of continuing concerns about the direction of EU legislation such as ATAD 3, the QAHC should now warrant serious consideration as an alternative asset holding company to the traditional Luxembourg and Irish vehicles historically used by private international debt and loan origination funds.
