buy-side seminar 2014: an update on tax, incentives and structuring issues for 2014 imogen garner,...
TRANSCRIPT
Buy-side seminar 2014:An update on tax, incentives and structuring issues for 2014
Imogen Garner, Andrew Roycroft, Kennedy Masterton-Smith, Louise Dent, Mike Newell and Claire O’DonnellNorton Rose Fulbright LLP24 June 2014
IntroductionImogen Garner
Introduction
• Partnership tax changes 2014
• Remuneration rules: AIFMD & UCITS V
• The pay-out process
• Limited Liability Partnership agreements
3
Partnership tax changes 2014Andrew Roycroft
5
Impact of partnership tax changes: Salaried members
• HMRC’s 21 February “informal view”
• UK LLPs only, but non-UK entities raise different issues
• Conditions A, B or C: Allows a “pick and mix” solution
• Focus on capital contributions:– 2/3 month grace period– Impact of the “TAAR”
• Other solutions:– Closely-held LLPs, and senior members: “Significant influence”– Variable profits:
Individual performance/“eat what you kill” Extraneous events, and hindsight Performance over the long run
• The Supreme Court decides – Bates van Winkelhof was a ‘worker’ (not an employee)
6
Mixed partnerships: Deferral and tax rate arbitrage
• All types of partnership, but with both individual and non-individual (i.e. corporate) members
• Deferred profit arrangements
• Power to enjoy the CM’s “excessive” profits:– CM who formed the LLP (recent conversions to LLP)– Outside investors, through CM (impact on profit share paid to executives?)
• Personal service companies, and feeder structures
• “Relief” for:– Compensating payments (to the individual member)– AIFM firms, in respect of relevant restricted profit
• Corporate members as vehicles for succession planning
Remuneration rules: AIFMD & UCITS VKennedy Masterton-Smith
New rules• Global focus on remuneration – new legislation
– AIFMD– UCITS V– MiFID II– CRD
• What rules apply?– Pay-out process rules
• Who is caught?– Full scope EU AIFMs/Small AIFMs/Non EU AIFMs– UCITS management companies or self-managed UCITS funds– Delegates
8
Delegation
• Delegate portfolio management or risk management activities – new requirement regarding remuneration:– AIFM must ensure that entities which have been delegated to are subject to
“regulatory requirements on remuneration that are “equally as effective” as those applicable to the AIFM”OR
– Contractual arrangements are put in place with the entities to ensure that there is no circumvention of the remuneration rules
• UCITS V – Recital 2:– “Policies and practices should apply, in a proportionate manner, to any third
party which takes investment decisions that affect the risk profile of the UCITS because of the functions which have been delegated”
• FCA confirmation re AIFMD that delegates subject to CRD rules generally considered to be subject to rules that are equally as effective
• Clarification on position of other regulators still needed
9
Proportionality• Can the pay-out process rules be applied proportionately?
– Size– Internal organisation– Nature, scope and complexity
• Identified Staff
10
Step process
• Consider whether you are caught directly or indirectly• If caught, can you disapply pay-out process rules on the grounds
of proportionality?• Keep an audit trail on disapplication and keep under review• Identify Identified Staff• Can the rules be applied proportionately to Identified Staff?• Undertake performance assessment• Apply the pay-out process rules (as appropriate) to awards • Undertake performance adjustment• Pay-out deferred awards
11
The pay-out processLouise Dent
13
Pay-out process components
50%
Retained units
Performance
adjustment
40%
Deferral
14
ExampleLLP
partner income
Remuneration
Variable remuneration
60% upfront
40% deferred
30% cash
30% units in funds
20% cash
20% units in funds
6 month retention period post-acquisition
6 month retention period
post-vesting
Delivered after 3 years subject to
malus performance adjustment provisions
All variable remuneration is at risk of
clawback under performance adjustment provisions for one year post acquisition/vesting
Subject to pay-out process rules
Subject to AIFM remuneration code
Not subject to AIFM remuneration code
Fixed remuneration
Return on investment
Not subject to pay-out process rules
15
What does the pay-out process apply to?
Code staff
• Categories of staff who have a “material impact on the risk profiles of the AIFM or the AIFs managed”
Individual disapplicati
on
• Pay-out process rules can be disapplied if an individual’s variable rem is ≤ 33% of total rem and total rem is ≤ £500k
• Other rules (e.g. guaranteed bonuses) still apply
Remunerati
on
• Pro-rata return on investment vs remuneration
Variable
remuneratio
n
• Fixed remuneration – no consideration of any performance criteria• Variable remuneration – additional pay/benefits depending on
performance or other criteria
16
Retained instruments: 50%
• Where management of AIFs accounts for less than 50% of the total portfolio
• “Subject to the legal structure of the AIF and the instrument constituting the fund”
Application considerations
• LLPs – units in underlying funds• Companies – shares or fund unitsWhich units?
• 6 months• Upfront and deferred elements• Post-vesting for deferred element
Retention
17
Deferral structure: 40% - 60%
• Net of tax if using proposed special rules for AIFMsLLP structures
• Net or gross of taxCompany structures
• Period “appropriate in the life cycle/redemption policy of fund”
• Vest no faster than time pro-ratedConditions
18
Performance adjustment
Malus
Unvested deferred elements
Instruments or cash
Clawback
Post-receipt
Upfront and deferred elements
Limited Liability Partnership agreementsMike Newell & Claire O’Donnell
20
Limited Liability Partnership agreements• The LLP agreement – where it can go wrong:
– Default regime– Profit and losses– Group structure– Management– Non-performing members/exit– Duties– Liabilities
• F&C Partners LLP judgement – where it did go wrong..?
21
Key contacts in London
Imogen Garner is a partner in the financial services group, where she advises a broad range of clients on the UK and EU financial services regimes.
Imogen’s areas of practice include advising on perimeter issues, the regulatory aspects of acquisitions and disposals and clients’ on-going compliance with anti-money laundering and other financial services law and regulation.
She also frequently drafts and negotiates investment management and other client agreements. Imogen has particular experience advising asset managers, and has also worked with a number of asset management industry trade bodies. She spent nine months on secondment to the FSA’s (as it then was) General Counsel’s Division, where she advised the FSA’s CIS Policy Team and HM Treasury on the AIFMD.
Imogen GarnerFinancial services - LondonPartnerNorton Rose Fulbright LLP+44 (0)20 7444 [email protected]
Andrew RoycroftTax - LondonSenior AssociateNorton Rose Fulbright LLP+44 (0)20 7444 [email protected]
Andrew is a senior associate in the London office’s tax department. He specialises in the UK tax aspects of structuring and implementing corporate transactions for both public and private companies, with a particular emphasis on international issues (residence, branch profits, CFC rules, etc.). The taxation of executive remuneration is another area of expertise.
His experience includes structuring equity incentives for managers, establishing and restructuring partnerships (including profit-sharing arrangements in Limited Liability Partnerships) and structuring termination packages. He is a Chartered Tax Adviser and a member of the International Tax sub-committee of the Chartered Institute of Taxation's Technical Committee. Chambers and Partners 2013: “Leading associate Andrew Roycroft advises clients on domestic and international corporate transactions and restructurings.”
22
Key contacts in London
Louise DentTax and incentives - LondonSenior AssociateNorton Rose Fulbright LLP+44 (0)20 7444 [email protected]
Kennedy Masterton-SmithFinancial services - LondonSenior AssociateNorton Rose Fulbright LLP+44 (0)20 7444 [email protected]
Kennedy is a financial services lawyer based in London and advises on a wide variety of financial services matters including advising banks, brokers and buy-side entities. She is a member of the Norton Rose LLP Asset and Wealth Management International Business Group and a co-author of the Compliance Officer Bulletin in relation to remuneration for financial services firms.
She regularly advises clients in relation to the remuneration regime in the UK, including in relation to the rules under CRD IV as they apply to a broad range of entities including banks, brokers and asset managers across the proportionality levels.
Kennedy also advises on the remuneration rules under AIFMD and the proposed rules under UCITS V.
She has spoken at a number of conferences on the remuneration regime.
Louise Dent is a senior associate specialising in employee benefits in our London office.
She advises listed and private companies in the UK and overseas on all aspects of employee incentives, including the implementation and operation of share plans, employment taxes and the incentives aspects of corporate transactions.
23
Key contacts in London
Mike NewellCorporate - LondonPartnerNorton Rose Fulbright LLP+44 (0)20 7444 [email protected]
Claire O’DonnellCorporate - LondonOf CounselNorton Rose Fulbright LLP+44 (0)20 7444 [email protected]
Claire O’Donnell is a corporate lawyer in our London office. She has over 10 years’ experience in UK and international mergers and acquisitions, joint ventures, capital fundraisings and general corporate and commercial transactions.
She has written a number of submissions to HM Treasury and articles for legal publications.
She works for a range of clients, including a number of multinationals as well as government entities.
Claire has particular experience in advising in relation to Limited Liability Partnership matters, including establishment, sale of interest and relations between members.
Mike Newell is a corporate lawyer in our London office. He has extensive experience of advising on the establishment and reorganisation of onshore and offshore collective investment vehicles.
Mike is particularly experienced in advising in relation to hedge funds, private equity, real estate funds, retail mutual funds, UK listed investment companies and structured products. He also advises asset managers in relation to general corporate, investment management and regulatory matters.
Mike is described as “practical and effective” in Chambers and Partners 2009. In Chambers UK 2010 he is noted for having “a well-established reputation in the structuring and reorganisation of onshore and offshore collective investment vehicles” and for being especially “renowned for his real estate funds expertise” in Chambers UK 2011.
24
AIFMD expert: Our guide to the AIFMD
25
Global coverage
DisclaimerNorton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members (‘the Norton Rose Fulbright members’) of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.
References to ‘Norton Rose Fulbright’, ‘the law firm’, and ‘legal practice’ are to one or more of the Norton Rose Fulbright members or to one of their respective affiliates (together ‘Norton Rose Fulbright entity/entities’). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a ‘partner’) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifications of the relevant Norton Rose Fulbright entity.
The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specific legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright.
27