Income Tax Citation and commencement 1 These Regulations may be cited as the Authorised Investment Funds (Tax) (Amendment) Regulations 2009 and shall come into force on 1st September 2009. Amendment of the Authorised Investment Funds (Tax) Regulations 2006 ( S.I. 2006/964 ) 2 The Authorised Investment Funds (Tax) Regulations 2006 are amended as follows. Amendment of regulation 2 3 In regulation 2 (structure of these Regulations) — a after “interpretation;” insert— Part 1A deals with the genuine diversity of ownership condition; , b after “Part 2A deals with qualified investor schemes” insert— Part 2B deals with diversely owned AIFs; , c after “Part 4A deals with Property AIFs;” insert— Part 4B deals with Tax Elected Funds; . Amendment of regulation 6 4 In regulation 6 (further definitions generally relevant for authorised investment funds) after paragraph (6) insert— 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. . Amendment of regulation 8 5 In regulation 8 (general interpretation) insert at the appropriate place— “connected person” has the meaning given in— sections 993 and 994 of ITA 2007 (connected persons) in the case of a person chargeable to income tax, and section 839 of ICTA (connected persons) in the case of a person chargeable to corporation tax; . Insertion of Part 1A 6 After regulation 9 (abbreviations and general index) insert the following Part— PART 1A THE GENUINE DIVERSITY OF OWNERSHIP CONDITION The genuine diversity of ownership condition 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 which is a Property AIF also meets the genuine diversity of ownership condition if— a an investor in the fund is a unit trust scheme (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). 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 (including any supplements to the prospectus). Clearance in relation to the genuine diversity of ownership condition 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. . Amendment of regulation 13 7 In regulation 13 (treatment of interest distributions for purposes of loan relationships) after paragraph (3) insert— 4 In this regulation an “interest distribution” includes a TEF distribution (non-dividend) (see regulation 69Z61(3)). . Amendment of regulation 14B 8 Regulation 14B (tax treatment of qualified investor schemes) is amended as follows. 1 In paragraph (1) for “14C” substitute “9A”. 2 In paragraph (2) after sub-paragraph (a) insert— aa the provisions of Part 4 of these Regulations, . 3 Omit paragraph (5). Omission of regulations 14C and 14D 9 Omit regulations 14C (the genuine diversity of ownership condition) and 14D (clearance in relation to the genuine diversity of ownership condition) . Insertion of Part 2B 10 After regulation 14B (tax treatment of qualified investor schemes) insert the following Part— PART 2B DIVERSELY OWNED AIFS Tax treatment of diversely owned AIFs 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 regulation 14F. 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” 14F 1 For the purposes of these Regulations an “investment transaction” means— a any transaction in stocks and shares; b any transaction in a relevant contract (and see regulations 14G to 14K); c any transaction which results in a diversely owned AIF becoming a party to a loan relationship or a related transaction in respect of a loan relationship (and see regulation 14L); d any transaction in units in a collective investment scheme (and see regulation 14M); e any transaction in securities (and see paragraph (2)); f any transaction consisting in the buying or selling of any foreign currency; g any transaction in a carbon emission trading product (and see regulation 14N). 2 In paragraph (1)(e) “securities” means securities of any description not falling within sub-paragraphs (a) to (d) of paragraph (1). Meaning of relevant contracts: general 14G 1 For the purposes of regulation 14F a “relevant contract” is— a an option, b a future, or c a contract for differences. 2 For the purposes of this regulation an option, a future or a contract for differences which relates to land will only be a relevant contract if the option, the future or the contract for differences uses an index referred to in regulation 14K(1)(b) and the index is— a publicly accessible, b comprised of a significant number of properties, and c not maintained by— i the diversely owned AIF, ii the manager of the diversely owned AIF, or iii a person who is a connected person in relation to the diversely owned AIF or the manager of the diversely owned AIF. Meaning of relevant contract: options 14H 1 For the purposes of regulation 14G an “option” includes an instrument which entitles the holder to subscribe for shares in a company or assets representing a loan relationship of a company, and for these purposes it is immaterial whether the shares or assets to which the instrument relates exist or are identifiable. 2 For the purposes of paragraph (1) the reference to a loan relationship of a company is to be construed in accordance with regulation 14L but with references in that regulation to “diversely owned AIF” treated as references to “company”. Meaning of relevant contract: futures 14I 1 For the purposes of regulation 14G a “future” is a contract for the sale of property under which delivery is to be made— a at a future date agreed when the contract is made, and b at a price so agreed. 2 For the purposes of paragraph (1)(b) a price is taken to be agreed when the contract is made— a notwithstanding that the price is left to be determined by reference to the price at which a contract is to be entered into on a market or exchange or could be entered into at a time and place specified in the contract, or b in a case where the contract is expressed to be by reference to a standard lot and quality, notwithstanding that provision is made for a variation in the price to take account of any variation in quantity or quality on delivery. Meaning of relevant contract: options and futures - general provisions 14J 1 For the purposes of regulations 14H and 14I references to an option or a future do not include references to a contract whose terms provide— a that, after setting off their obligations to each other under the contract, a cash payment is to be made by one party to the other in respect of the excess, if any, and do not provide for the delivery of any property, b that each party is liable to make to the other party a cash payment in respect of all that party’s obligations to the other under the contract and do not provide for the delivery of any property, or c for the delivery of any property other than property a transaction in which would fall within regulation 14F(1) where the property is delivered. 2 Nothing in paragraph (1) has effect to exclude, from references to a future or option, a future or option whose underlying subject matter is currency. 3 In paragraph (1) “underlying subject matter” means— a in relation to a future, the property which, if the future were to run to delivery, would fall to be delivered at the date and price agreed when the contract is made, and b in relation to an option, the property which would fall to be delivered if the option were exercised. Meaning of relevant contract: contract for differences 14K 1 For the purposes of regulation 14G a “contract for differences” is a contract the purpose or pretended purpose of which is to make a profit or avoid a loss by reference to fluctuations in— a the value or price of property described in the contract, or b an index or other factor designated in the contract. 2 For the purposes of paragraph (1)(b) an index or factor may be determined by reference to any matter and, for these purposes, a numerical value may be attributed to any variation in a matter. 3 For the purposes of regulation 14G none of the following is a contract for differences— a an option, b a future, c a contract of insurance, d a contract effected in the course of capital redemption business, e a contract of indemnity, f a guarantee, g a warranty, h a loan relationship. 4 For the purposes of paragraph (3)— “capital redemption business” means any business of a company carrying on insurance business in so far as it consists of the effecting on the basis of actuarial calculations, and the carrying out, of contracts under which, in return for one or more fixed payments, a sum or series of sums of a specified amount becomes payable at a future time or over a period; “loan relationship” is to be construed in accordance with regulation 14L but with references to “diversely owned AIF” in that regulation treated as references to “company”. Loan relationships or related transactions 14L 1 For the purposes of regulation 14F a diversely owned AIF has a “loan relationship” if that diversely owned AIF stands (whether by reference to a security or otherwise) in the position of a creditor or debtor as respects any money debt and either— a that debt is one arising from a transaction for the lending of money; or b that debt is not one which arose from a transaction for the lending of money but is one— i on which interest is payable to or by the diversely owned AIF, or ii in relation to which exchange gains or losses arise to the diversely owned AIF, or iii as respects which the conditions in paragraph (2) below are satisfied. 2 The conditions referred to in paragraph (1)(b)(iii) are that— a the diversely owned AIF stands in the position of creditor in relation to the money debt; and b the money debt is one from which a discount (whether of an income or capital nature) arises to the diversely owned AIF. 3 For the purposes of this regulation “exchange gains or losses” means profits or gains or losses which arise as a result of comparing at different times the expression in one currency of the whole or some part of the valuation put by the diversely owned AIF in another currency on an asset or liability of the diversely owned AIF. 4 For the purposes of this regulation a “money debt” is a debt which is, or has at any time been, one that falls, or that may at the choice of the debtor or of the creditor fall, to be settled— a by the payment of money, b by the transfer of a right to settlement under a debt which is itself a money debt, or c by the issue or transfer of shares in any company, disregarding any other alternative exercisable by either party. 5 Subject to paragraph (6), if an instrument is issued by any person for the purpose of representing security for, or the rights of a creditor in respect of, any money debt, then (whatever the circumstances of the issue of the instrument) that debt shall be taken for the purposes of this regulation to be a debt arising from a transaction for the lending of money. 6 For the purposes of this regulation a debt shall not be taken to arise from a transaction for the lending of money to the extent that it is a debt arising from rights conferred by shares in a company. 7 For the purposes of this regulation so far as relating to exchange gains or losses any currency held by the diversely owned AIF shall be treated as a money debt. 8 For the purposes of this regulation “money” includes money expressed in a currency other than sterling. 9 In this Part a “related transaction” in relation to a loan relationship means any disposal or acquisition (in whole or in part) of rights or liabilities under that relationship. Units in a collective investment scheme 14M 1 For the purposes of regulation 14F “units” in a collective investment scheme means the rights or interests (however described) of the participants in the collective investment scheme. 2 For the purposes of this regulation “participant” has the same meaning as given by regulation 6(6) but with references to “authorised investment fund” and “fund” being read as references to “collective investment scheme”. Carbon emission trading products 14N 1 For the purposes of regulation 14F a carbon emission trading product is— a a Community tradable emissions allowance, or b a transferable unit issued pursuant to the Kyoto Protocol, which does not otherwise fall within any other regulation of this Part. 2 For the purpose of this regulation— “Community tradable emissions allowance” means a transferable allowance which relates to the making of emissions of greenhouse gases which are allocated as part of a system made for the purpose of implementing any Community obligation of the United Kingdom relating to such emissions; “the Kyoto Protocol” means the Kyoto Protocol to the United Nations Framework Convention on Climate Change signed at Kyoto on 11th December 1997 ; “unit” includes an assigned amount unit, certified emission reductions, an emission reduction unit and a removal unit. . Amendment of regulation 17 11 In regulation 17 (contents of distribution accounts) after paragraph (1) insert— 1A Paragraph (1) does not apply in relation to an authorised investment fund to which Part 4A or 4B applies. . Amendment of regulation 48 12 In paragraph (4) of regulation 48 (dividend distributions: general) for “14C” substitute “9A”. Amendment of regulation 51 13 In paragraph (1)(b) of regulation 51 (participants chargeable to corporation tax: holdings in qualified investor schemes where scheme does not meet the genuine diversity of ownership condition) for “14B” substitute “9A”. Insertion of regulations 52B to 52E 14 After regulation 52A (companies carrying on general insurance business: treatment of certain amounts of tax as foreign tax) insert— Diversely owned AIFs and financial traders: treatment of shares and units 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— in the case of a financial trader within the charge to corporation tax, an accounting period, and in the case of a financial trader within the charge to income tax, a period of account; “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 AIFs 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— in the case of shares or units in a diversely owned AIF where both the buying and selling prices of units are published regularly by the manager of the fund, an amount equal to the buying price (that is the lower price) so published on any particular date or, if none were published on that date, on the latest date before; in the case of shares or units in a diversely owned AIF where a single price is published regularly by the manager of the fund, the price so published on any particular date, or if none were published on that date, on the latest date before. Shares and units not within regulation 52C 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 trader 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 . Amendment of regulation 69D 15 In paragraph (b) of regulation 69D (conditions for this part to apply to company) for “69J” substitute “9A”. Omission of regulation 69DA 16 Omit regulation 69DA (conditions for this part to apply to a company where the company is also a qualified investor scheme) . Omission of regulation 69J 17 Omit regulation 69J (the genuine diversity of ownership condition) . Amendment of regulation 69O 18 In paragraph (5)(b) of regulation 69O (the notification condition) for “69J” substitute “9A”. Amendment of regulation 69P 19 Regulation 69P (form and timing of notice under regulation 69O) is amended as follows— a in paragraph (7)(a) for “69U” substitute “9B”, and b in paragraph (8)(a) for “69U” substitute “9B”. Amendment of regulation 69Q 20 Regulation 69Q (contents of notice under regulation 69O) is amended as follows— a in paragraph (3)(a) after “specified in” insert “regulation 9A and”, and b in paragraph (5)(a) after “specified in” insert “regulation 9A and”. Omission of regulation 69U 21 Omit regulation 69U (clearance in relation to the genuine diversity of ownership condition) . Amendment of regulation 69Z8 22 In paragraph (1)(a) of regulation 69Z8 (multiple breaches of separate conditions) after “in” insert “regulation 9A or”. Substitution of regulation 69Z34 23 For regulation 69Z34 (certificates of deduction of tax) substitute— Certificates of deduction of tax 69Z34 1 A company making a relevant distribution which is subject to deduction of tax by virtue of regulation 69Z22(1) must furnish the recipient with a statement that complies with condition A or B. This is subject to paragraph (5). 2 The duty imposed by paragraph (1) is enforceable at the suit or instance of the recipient. 3 Condition A is that the statement is in writing showing— a the gross amount of the payment, b the amount of tax deducted, and c the actual amount paid. 4 Condition B is that the statement is in writing— a showing— i the gross amount of the distribution made to the participant, ii the number and class of units held by the participant in respect of which the distribution is made, iii the net amount of the distribution per unit, iv whether any tax has been deducted from the distribution, and v the date the distribution was made; b providing details to allow the participant to access an electronic means of calculating the amounts that would be shown in a statement provided in accordance with condition A; and c providing the participant with an alternative method of obtaining the details of those amounts without recourse to electronic means. 5 If an appropriate statement for the purposes of section 234A of ICTA is provided by the company in accordance with regulation 70(4) and (5)— a condition A does not apply, and b the statement required by condition B must be included in the appropriate statement. 6 Where paragraph (5) applies, “distribution” in regulation 70(4) and (5) shall be taken to include the property income distribution and the statement must show the percentage of the gross distribution attributable to the property income distribution. . Insertion of Part 4B 24 After regulation 69Z41 insert the following Part— PART 4B TAX ELECTED FUNDS CHAPTER 1 PRELIMINARY PROVISIONS Tax Elected Funds 69Z42 1 This Part makes provision in relation to an authorised investment fund which meets the conditions in regulations 69Z45 to 69Z48. 2 In these Regulations an authorised investment fund to which this Part applies may be referred to as a “Tax Elected Fund”. Structure of this Part 69Z43 The structure of this Part is as follows— this Chapter contains preliminary provisions; Chapter 2 deals with entry into and membership of the Tax Elected Funds regime; Chapter 3 deals with the tax treatment of Tax Elected Funds; Chapter 4 deals with distributions made by Tax Elected Funds; Chapter 5 deals with the treatment of participants in Tax Elected Funds; Chapter 6 deals with compliance in relation to the Tax Elected Funds regime; and Chapter 7 contains provisions relating to an authorised investment fund’s leaving the Tax Elected Funds regime. Interpretation 69Z44 In this Part— “entry” means the time when this Part begins to apply to an authorised investment fund; “cessation” means the time when this Part ceases to apply to an authorised investment fund; “overseas property business” has the meaning given in section 206 of CTA 2009; “ UK property business” has the meaning given in section 205 of CTA 2009. CHAPTER 2 ENTRY INTO AND MEMBERSHIP OF THE TAX ELECTED FUNDS REGIME Conditions of membership of the Tax Elected Funds regime Conditions for this Part to apply to fund 69Z45 In order for this Part to apply to an authorised investment fund in respect of an accounting period— a the following conditions (the “TEF conditions”) must be met— i the property condition (see regulation 69Z46); ii the genuine diversity of ownership condition (see regulation 9A); iii the loan creditor condition (see regulation 694Z47); and iv the scheme documentation condition (see regulation 69Z48); and b an application for this Part to apply must be accepted by HM Revenue and Customs (see regulations 69Z49 to 69Z53). The TEF conditions The property condition 69Z46 The property condition is that the authorised investment fund does not have a UK property business or an overseas property business. The loan creditor condition 69Z47 1 The loan creditor condition is that the authorised investment fund must meet conditions A to C throughout the accounting period in the case of any loan relationship to which the fund is party as a debtor. 2 Condition A is that, in the case of a debtor relationship of the fund, 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 authorised investment fund’s business, or b the value of any of the fund’s assets. 3 For the purposes of condition A, a loan shall not be treated as dependent on the results of the fund’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 fund, 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 fund, 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 Part 5 of CTA 2009 (loan relationships) . The scheme documentation condition 69Z48 The scheme documentation condition is that the instrument constituting the authorised investment fund and its prospectus must include provisions which require the fund to meet the property condition and the loan creditor condition on entry and throughout the accounting period. Application for this Part to apply Application process 69Z49 1 An application for this Part to apply to an authorised investment fund may be made by— a the manager of an existing authorised investment fund, or b if it is proposed to establish an authorised investment fund, the person expected to become the manager of the fund once established (the “applicant”). 2 Before making an application in relation to an existing authorised investment fund, the fund must obtain any necessary shareholder or unit holder approval and must have applied for any necessary regulatory approval in respect of the instrument constituting the fund and the prospectus. 3 The manager or applicant must notify HM Revenue and Customs when any necessary regulatory authorisation has been given. 4 Where in relation to an existing authorised investment fund this Part has previously applied to the fund— a no application may be made if a termination notice was issued in relation to the fund, or b if an election was made under regulation 69Z70 that this Part should cease to apply, no application can be made in relation to any accounting period which begins within six years of the cessation. 5 In this Part— “applicant” means the person referred to in paragraph (1)(b); “application” means an application under this regulation; “existing fund application” means an application made under paragraph (1)(a); and “future fund application” means an application made under paragraph (1)(b). Form and timing of application under regulation 69Z49 69Z50 1 An application must be made in writing to the Commissioners. 2 An existing fund application must be received by HM Revenue and Customs at least 28 days before the beginning of the specified accounting period (see regulation 69Z51(2)). This is subject to paragraph (8). 3 A future fund application must be received by HM Revenue and Customs at least 42 days before the date the fund is expected to be established and authorisation given. This is subject to paragraph (9). 4 Within a period of 28 days (or 14 days in the case of an application within paragraph (8) or (9)) beginning on the day on which the application is received, HM Revenue and Customs must— a notify the manager or applicant that the application is accepted, or b issue a refusal notice. 5 An application may be withdrawn or amended at any time before it is accepted— a by the manager (in the case of an existing fund application), or b by the applicant (in the case of a future fund application). 6 If an application is amended before it is accepted, regulation 69Z49 shall apply to the amended application. 7 But if HM Revenue and Customs give notice that they are satisfied that the amended application is valid, the amended application shall take effect as if made on the date of the original application. 8 An existing fund application may be received by HM Revenue and Customs at least 14 days before the beginning of the specified accounting period if— a HM Revenue and Customs have given clearance under regulation 9B, and b the manager of the authorised investment fund certifies that there have been no changes in substance between— i the form in which the instrument constituting the fund 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 accounting period. 9 A future fund application may be received by HM Revenue and Customs at least 14 days before the proposed fund is authorised and established if— a HM Revenue and Customs have given clearance under regulation 9B, and b the applicant certifies that there have been no changes in substance between— i the form in which the instrument constituting the fund 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 fund is authorised. Contents of application under regulation 69Z49 69Z51 1 An application must include the following information. 2 An existing fund application must specify the accounting period from the beginning of which the application seeks to apply this Part to the fund (the “specified accounting period”). 3 An existing fund application must be accompanied by— a a statement by the manager of the authorised investment fund that the TEF conditions are reasonably expected to be met in respect of the fund throughout the specified accounting period; b the following documents relating to the fund— i the instrument constituting the fund, and ii its prospectus; c a statement by the manager as to whether or not this Part has previously applied to the fund and where this Part has previously applied that statement must include— i the dates of entry and cessation, and ii a statement by the manager that a termination notice has never been issued in respect of the fund; d a statement by the manager that either— i shareholder or unit holder consent to the application is not required, or ii shareholder or unit holder consent has been given, in which case the statement must specify the date of the shareholder or unit holder resolution giving consent; e a copy of the application to the Financial Services Authority for approval for any changes in the instrument constituting the fund and its prospectus; and f copies of any documents accompanying the application mentioned in sub-paragraph (e) to the extent that those documents do not fall within sub-paragraphs (a) to (d). 4 A future fund application must specify the date it is expected the fund will be established and authorisation given and seek to apply this Part to the proposed fund from that date. 5 A future fund application must be accompanied by— a a statement by the applicant that the TEF conditions are reasonably expected to be met in respect of the proposed fund throughout its first accounting period; b the following documents relating to the proposed fund— i the proposed instrument constituting the fund, and ii its proposed prospectus (including any supplements to the proposed prospectus); c a copy of the application to the Financial Services Authority for authorisation of the proposed fund as an authorised investment fund; 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 making of applications for this Part to apply Refusing an application: refusal notice 69Z52 1 If any of conditions A to C are met HM Revenue and Customs must refuse the application and give a notice (a “refusal notice”)— a to the manager of the authorised investment fund if an existing fund application has been made, or b to the applicant if a future fund application has been made. 2 Condition A is that— a the documents supplied do not demonstrate that the authorised investment fund (or the proposed authorised investment fund) will meet all the TEF conditions, or b the statement given in accordance with regulation 69Z51(3)(a) or (5)(a) does not demonstrate that the fund (or proposed fund) can reasonably be expected to meet all the TEF conditions throughout the specified accounting period or the first accounting period. 3 Condition B is that the application is not accompanied by the documents and statements specified in regulation 69Z51(3) in the case of an existing fund application or regulation 69Z51(5) in the case of a future fund application. 4 Condition C is that any necessary shareholder, unit holder or regulatory authorisation or approval has not been given. 5 A refusal notice must specify the reason for refusing the application. Appeal against refusal notice 69Z53 1 A person to whom a refusal notice is given may appeal. 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 refusal notice is given. 3 On an appeal that is notified to the tribunal, the tribunal shall determine whether it was just and reasonable for HM Revenue and Customs to give the refusal notice. 4 If the tribunal allow the appeal— a they may direct that this Part shall apply to the authorised investment fund (or, as the case may be, to the proposed authorised investment fund), and b they 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 fund application has been made, and b must not be earlier than the date of authorisation by the Financial Services Authority if a future fund application has been made. Consequences of entry Effects of entry 69Z54 On entry a new distribution period of the authorised investment fund shall begin. Duration 69Z55 Once this Part has begun to apply to an authorised investment fund it shall continue to apply unless and until it ceases to apply in accordance with Chapter 7 of this Part. CHAPTER 3 THE TAX TREATMENT OF TAX ELECTED FUNDS Components of income 69Z56 1 For the purposes of corporation tax, the income arising to a Tax Elected Fund consists of— a dividend income; b property investment income, being— i distributions of profits of C (tax-exempt) in relation to shares held in a UK-REIT, and ii property income distributions in relation to shares held in a Property AIF; c property business income (arising on a breach of the property condition), being— i profits of a UK property business that are not within sub-paragraph (b), and ii income from an overseas property business; and d other income. 2 In this regulation, “C (tax-exempt)” shall be construed in accordance with Part 4 of FA 2006 . Treatment of property investment income 69Z57 1 Section 7(2) of ICTA (treatment of certain payments and repayments of income tax: set off of tax) shall not apply to payments of property investment income. 2 Property investment income arising to a Tax Elected Fund shall be treated for the purposes of the Tax Acts as a distribution that is exempt for the purposes of Part 9A of CTA 2009 (company distributions) but shall not be treated as franked investment income. Treatment of distributions 69Z58 Section 931R of CTA 2009 (election that distribution should not be exempt) shall not apply in relation to distributions received by a Tax Elected Fund. CHAPTER 4 DISTRIBUTIONS MADE BY TAX ELECTED FUNDS Attribution of distributions 69Z59 1 The total amount shown in the distribution accounts of a Tax Elected Fund as available for distribution to participants shall be attributed as follows. 2 There shall be attributed to TEF distributions (dividends)— a dividend income, b property investment income, and c property business income. 3 Other income shall be attributed to TEF distributions (non-dividend). TEF distributions (dividends) 69Z60 1 This regulation applies if— a a Tax Elected Fund makes a distribution, and b the amount distributed includes sums attributed to TEF distributions (dividends). 2 The Tax Acts shall have effect as if the sums were dividends on shares paid on the distribution date by the fund to the participants in proportion to their rights. 3 In this Part a “TEF distribution (dividend)” means a sum attributed to TEF distributions (dividends) which is distributed (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). TEF distributions (non-dividend) 69Z61 1 This regulation applies if— a a Tax Elected Fund makes a distribution, and b the amount distributed includes sums attributed to TEF distributions (non-dividend). 2 The Tax Acts shall have effect as if the sums were payments of yearly interest made on the distribution date by the fund to the participants in proportion to their rights. 3 In these Regulations a “TEF distribution (non-dividend)” means a sum attributed to TEF distributions (non-dividend) which is distributed (including a payment made to a participant who is not chargeable to income tax). 4 This regulation is subject to regulation 23 (treatment of de minimis amounts). CHAPTER 5 THE TREATMENT OF PARTICIPANTS IN TAX ELECTED FUNDS TEF distribution (dividend) Participants chargeable to corporation tax 69Z62 1 If a TEF distribution (dividend) is made for a distribution period to a participant within the charge to corporation tax, regulations 48 to 52A (dividend distributions) shall apply with the modifications specified in paragraph (2). 2 The specified modifications are— a for “dividend distribution” in each place it occurs there shall be substituted “TEF distribution (dividend)”; b in regulation 50 (references to gross income) for “distribution accounts” there shall be substituted “TEF distributions (dividends) account”; c for “an authorised investment fund” in each place it occurs there shall be substituted “a Tax Elected Fund”; and d for “the authorised investment fund” in each place it occurs there shall be substituted “the Tax Elected Fund”. TEF distributions (non-dividend) Obligation to deduct tax from TEF distributions (non-dividend) 69Z63 1 If a TEF distribution (non-dividend) is made for a distribution period to a participant within the charge to income tax, regulations 26 to 33 (deduction of tax from interest distributions: general) shall apply with the modification specified in paragraph (3). 2 If a TEF distribution (non-dividend) is made for a distribution period to a participant within the charge to corporation tax, regulation 47 (the obligation to deduct tax) shall apply with the modification specified in paragraph (3). 3 The modification specified is that for “interest distribution” in each place it occurs there shall be substituted “TEF distribution (non-dividend)”. Modification of section 490 of CTA 2009 69Z64 Section 490 of CTA 2009 (holdings in OEICs, unit trusts and offshore funds treated as creditor relationship rights) shall apply to a participant in a TEF as if in subsections (4) and (5) for “interest distribution” there were substituted “TEF distribution (non-dividend)”. CHAPTER 6 COMPLIANCE IN RELATION TO THE TAX ELECTED FUNDS REGIME Breaches of TEF conditions Breach of conditions: general 69Z65 1 This regulation applies if a Tax Elected Fund— a does not meet one of the TEF conditions, and b becomes aware that it does not meet the condition. 2 Within 28 days of becoming aware of the breach, the fund 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 fund became aware of the breach; c details of the condition that was breached; d the nature of the breach; e the steps the fund proposes to take to rectify the breach; f the date by which the fund proposes to rectify the breach; and g where there has been a previous breach of the TEF conditions, details of the condition that was breached on that occasion, the date of that breach and the date that breach was rectified. 3 The date referred to in paragraph (2)(f) must be the earliest date by which the objective of complying with the relevant condition may reasonably be achieved. 4 The Commissioners must give a termination notice to the fund if— a the steps that the fund proposes to take will not rectify the breach; b the date by which the fund proposes to rectify the breach is not the earliest date by which the objective of remedying the relevant condition may reasonably be achieved; c the fund is intentionally or negligently in breach of a condition; or d there are three breaches of the same TEF condition in a period of ten years beginning with the first day of the accounting period in which the fund becomes aware of the first of those breaches. Breach of the property condition, genuine diversity of ownership condition or scheme documentation condition 69Z66 1 This regulation applies if a Tax Elected Fund is in breach of the property condition, genuine diversity of ownership condition or scheme documentation condition. 2 If the fund is inadvertently in breach but rectifies the breach within a reasonable time of the fund becoming aware of the breach, this Part shall continue to apply to the fund despite the breach (but see regulations 69Z65(4)(d) and 69Z68). 3 If the fund is inadvertently in breach but does not rectify the breach within a reasonable time of the fund first becoming aware of the breach, the Commissioners must give a termination notice to the fund. Breach of the loan creditor condition 69Z67 1 This regulation applies if a Tax Elected Fund is in breach of the loan creditor condition. 2 If the fund is inadvertently in breach but rectifies the breach within a period of 28 days beginning with the day on which the fund first becomes aware of the breach, this Part shall continue to apply to the fund despite the breach (but see paragraph (4) and regulations 69Z65(4)(d) and 69Z68). 3 If the fund is inadvertently in breach but does not rectify the breach within a period of 28 days beginning with the day on which the fund first becomes aware of the breach, the Commissioners must give a termination notice to the fund. 4 If the fund is in breach of the same condition specified in paragraphs (2) to (5) of regulation 69Z47 in two different accounting periods in a period of ten years beginning with the first day of the accounting period in which the fund becomes aware of the first of those breaches, the Commissioners must give a termination notice to the fund. Multiple breaches of separate conditions 69Z68 The Commissioners must give a termination notice to a Tax Elected Fund if— a there has been a breach of at least two of the TEF conditions, and b there have been four breaches in a period of ten years beginning with the first day of the accounting period in which the first breach occurs. Information about possible breaches of the TEF conditions Information to be provided to officers of Revenue and Customs 69Z69 1 This regulation applies if an officer of Revenue and Customs thinks that a Tax Elected Fund— a does not meet, or may not meet, one of the TEF conditions, or b has not rectified a breach of such a condition. 2 The officer may serve a notice (an “information notice”) on the manager of the fund requiring the manager to provide any of the information specified in regulation 69Z65(2) within a specified period. 4 If the manager does not comply with the information notice within the specified period the Commissioners must give a termination notice. 5 In this regulation the specified period is a period of 28 days beginning with the day on which the notice is served or, on an application by the manager, such longer period as the officer of Revenue and Customs thinks is reasonable. CHAPTER 7 LEAVING THE TAX ELECTED FUNDS REGIME Termination by election: authorised investment fund 69Z70 1 This regulation applies if a Tax Elected Fund gives a notice under this regulation electing that this Part is to cease to apply to the fund at the end of a specified accounting period. 2 This Part shall cease to apply to the fund at the end of that accounting period. 3 A notice under paragraph (1) must— a be given in writing to the Commissioners, b be given before the end of the accounting period specified in paragraph (1), and c give the reasons for the fund leaving the TEF regime. Termination by notice: Commissioners 69Z71 1 This regulation applies if the Commissioners give a notice in writing under this paragraph to a Tax Elected Fund (a “termination notice”). 2 This Part shall cease to apply to the fund. 3 The Commissioners may give a termination notice only if a provision contained in this Part provides that the Commissioners must give a termination notice. 4 A termination notice must state the reason for it. 5 If a termination notice is given to an authorised investment fund, this Part shall be taken to have ceased to apply to the fund at the end of the accounting period immediately preceding the accounting period in which the notice was given. 6 But regulations 13 (treatment of interest distributions for the purpose of loan relationships), 69Z61 (TEF distributions (non-dividend)) and 69Z63 (obligation to deduct tax from TEF distributions (non-dividend)) shall apply in relation to any TEF distribution (non-dividend) made before the notice was given. Appeal against termination notice 69Z72 1 An authorised investment fund to which a termination notice is given may appeal. 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 termination notice is given. 3 On an appeal that is notified to the tribunal, the tribunal shall determine whether it was just and reasonable for HM Revenue and Customs to give the termination notice. 4 If they decide that it was, they must confirm the notice. 5 If they decide that it was not, they must set aside the notice. Mergers 69Z73 1 This regulation applies if a Tax Elected Fund— a is party to a merger or takeover, and b as a result, ceases to meet one or more of the TEF conditions. 2 On the occurrence of the merger or takeover— a an accounting period of the fund shall end at the end of the date of the merger or takeover, and b this Part shall cease to apply to the fund at the end of that date. . Amendment of regulation 70 25 In regulation 70 (application of section 234A of ICTA) after paragraph (3) insert— 4 In the case of a Property AIF and a Tax Elected Fund, an appropriate statement for the purposes of section 234A of ICTA includes a written statement— a showing the details specified in paragraph (5), b providing details to allow the participant to access an electronic means of calculating the amounts that would be shown in a written statement that would, apart from this paragraph, be provided in accordance with subsection (6) (in the case of a PAIF distribution (interest) or a TEF distribution (non-dividend)) or subsection (7) (in the case of a PAIF distribution (dividends) or a TEF distribution (dividend)) of section 234A, and c providing the participant with an alternative method of obtaining the details of those amounts without recourse to electronic means. 5 The specified details are— a the gross amount of the distribution made to the participant, b the number and class of units held by the participant in respect of which the distribution is made, c the net amount of the distribution per unit, d whether any tax has been deducted from the distribution, e the date the distribution was made, and f the percentage of the gross distribution attributable— i in the case of a Property AIF, to PAIF distribution (interest) and to PAIF distribution (dividends), or ii in the case of a Tax Elected Fund, to TEF distribution (dividend) and to TEF distribution (non-dividend). . Amendment of headings 26 In the heading before regulation 71 and the headings to regulations 71 and 72, after “interest distributions” insert “and TEF distributions (non-dividend)”. Amendment of regulation 71 27 In paragraph (1) of regulation 71 (notification of interest distributions made without deduction of tax) after “interest distributions” insert “and TEF distributions (non-dividend)”. Amendment of regulation 72 28 In paragraph (1) of regulation 72 (information about interest distributions made without deduction of tax) after “interest distributions” insert “and TEF distributions (non-dividend)”. Amendment of regulation 74 29 In paragraph (2)(c), (d) and (e) of regulation 74 (use of information) after “interest distribution” in each place it occurs insert “or a TEF distribution (non-dividend)”. Amendment of regulation 95 30 In regulation 95 (modifications of CTA 2009 ) after paragraph (1) insert— 1A In section 297 (trading credits and debits to be brought into account under Part 3) after subsection (1) the following subsections are treated as inserted— 1A For the purposes of subsection (1) a “diversely owned AIF is treated as being party to all of its loan relationships other than for the purposes of a trade carried on by it. 1B In subsection (1A) “diversely owned AIF” has the meaning given by regulation 14E of the Authorised Investment Funds (Tax) Regulations 2006. . 1B In section 573 (trading debits and credits to be brought into account under Part 3) after subsection (1) the following subsections are treated as inserted— 1A For the purposes of subsection (1) a diversely owned AIF is treated as being party to all of its derivative contracts other than for the purposes of a trade carried on by it. 1B In subsection (1A) “diversely owned AIF” has the meaning given by regulation 14E of the Authorised Investment Funds (Tax) Regulations 2006. . . Amendment of regulation 96 31 1 Regulation 96 (modifications of ITTOIA 2005 ) is amended as follows. 2 After paragraph (1) insert— 1A In the application of the provisions specified in paragraph (1B) in relation to a Property AIF and a Tax Elected Fund— a for “the total” substitute “an”, and b the amount available for distribution as PAIF distribution (interest) or TEF distribution (non-dividend), as the case may be, shall be treated as the amount available for distribution as yearly interest. 1B The specified provisions are— a section 373(1) (open-ended investment company interest distributions), and b section 376(1) (authorised unit trust interest distributions). . 3 In paragraph (3)(b) for “376(1)” substitute “377(1)”. Amendment of the Schedule 32 1 The Schedule (abbreviations and defined expressions) is amended as follows. 2 In Part 1 (abbreviations of Acts) insert at the appropriate place— CTA 2009 The Corporation Tax Act 2009 (c. 4) . 3 In Part 2 (index of defined expressions) — a in the entry relating to “genuine diversity of ownership condition”— i omit “(in Part 4A)”, and ii for “69J” substitute “9A”; b in the entry relating to “instrument constituting the scheme” for “14B” substitute “6(7)”; c insert at the appropriate place— Applicant (in Part 4B) “Application (in Part 4B) Regulation 69Z49(5)” Regulation 69Z49(5)” “Cessation (in Part 4B) Regulation 69Z44” “Distribution income (in Part 4B) dRegulation 69Z56(1)(a)” “Diversely owned AIF Regulation 14E(2)” “Entry (in Part 4B)d Regulation 69Z44”d “Existing fund application (in Part 4B) Regulation 69Z49(5)” “Fund documents Regulation 9A(10)” “Future fund application (in Part 4B) Regulation 69Z49(5)” “Information notice (in Part 4B) Regulation 69Z67(2)” “Instrument constituting the fund Regulation 6(7)” “Investment transaction Regulation 14E(5)” “Loan creditor condition (in Part 4B) Regulation 69Z47” “Property condition (in Part 4B) Regulation 69Z46” “Property business income (in Part 4B) Regulation 69Z56(1)(c)” “Property investment income (in Part 4B) Regulation 69Z56(1)(b)” “Refusal notice (in Part 4B) Regulation 69Z52(1)” “Specified accounting period (in Part 4B) Regulation 69Z51(2)” “Tax Elected Fund Regulation 69Z42(2)” “TEF conditions (in Part 4B) Regulation 69Z45(a)” “TEF distribution (dividend) (in Part 4B) Regulation 69Z60(3)” “TEF distribution (non-dividend) Regulation 69Z61(3)” “Termination notice (in Part 4B) Regulation 69Z70(1)”. Amendment of the Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulations 2006 33 1 The Real Estate Investment Trusts (Assessment and Recovery of Tax) Regulations 2006 are amended as follows. 2 In regulation 7 (gross payment of distributions) after paragraph (2) insert— 2A But paragraph (2) does not apply to a Tax Elected Fund. 2B In paragraph (2A) “Tax Elected Fund” has the meaning given by regulation 69Z42(2) of the Authorised Investment Funds (Tax) Regulations 2006. . Dave Watts Frank Roy Two of the Lords Commissioners of Her Majesty’s Treasury 21st July 2009