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The impact of the coronavirus pandemic on fund and alternative capital managers: tax considerations in the rapidly changing landscape

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The impact of the coronavirus pandemic on fund and alternative capital managers: tax considerations in the rapidly changing landscape

Fund and alternative capital managers and their portfolio investments are facing unprecedented challenges dealing with the impact of the coronavirus COVID-19 pandemic.

Appearing on law firm Baker McKenzie's Funds Tax Bite No. 5 (March 2020), Director - Alternative Investments, Rory Blazeby co-authors an article analysing some of the key issues that general partners and their investee companies should be considering in these turbulent times from tax and related administrative perspectives.

Why is it relevant to me?

Tax authorities around the world are introducing measures to support businesses by providing, amongst others, tax relief and deferral measures. Such measures should be reviewed carefully and, if appropriate, claimed in the relevant jurisdictions of operation.

Separately, travel restrictions may have an impact on agreements with group companies, third parties and tax authorities. These restrictions could also inadvertently shift a company's taxable presence to other jurisdictions and affect transfer pricing. As such, the relevant arrangements should be reviewed and appropriate mitigation measures put in place. 

In more detail…

The implications of Coronavirus on asset managers will be far reaching. The effects are already being felt across the value chain, be it on workforce, operations, finance, liquidity and strategy; few, if any, operational areas have been untouched. Funds structures, like most other businesses, have borne the brunt in the last few weeks. Although unclear when the pandemic will ease, there are certain approaches that GPs can take now to mitigate the impact on their fund structures and underlying investments.

We have set out below some of the areas that are impacted, together with possible mitigation techniques.

Assistance from tax authorities and governments

By now, many governments have launched special tax support programmes to help businesses and individuals affected by the coronavirus. In particular, most European countries have recently announced tax support measures (including deferred tax payments, cash grants, tax rebates and extensions of tax return filing deadlines), and the EU Competition Commissioner confirmed that such tax reliefs would not be regarded as illegal state aid.

The UK has similarly introduced a number of measures to support businesses, including:

  • bespoke arrangements to defer income and corporation tax payment obligations (and potentially other taxes) through the Time to Pay platform;
  • deferral of VAT payments from 20 March 2020 for 3 months; and
  • the introduction of business rates holidays.

As a result, GPs should review their tax positions and consider approaching relevant tax authorities now for support and / or claiming available tax reliefs. Baker McKenzie has already been speaking to HMRC on behalf of one affected client, with a view to improving its short term cash flow position.

Corporate tax residence and permanent establishments

Perhaps one of the most acute implications of the spread of the pandemic could be the effect of travel restrictions on the tax residency of funds and individuals. This can lead to the following issues:

  • A company's tax residence status may be challenged if its' non-resident directors are not able to travel for board meetings and instead dial-in from another country. This could apply to UK directors who normally travel to the Channel Islands or other countries for meetings of GPs or holding companies. It remains to be seen whether tax authorities will adopt a lenient approach towards these issues. In the meantime, it would be prudent to assume that the existing rules have not changed (in which case, to the extent possible, key business decisions should not be made during board meetings that are attended by directors dialling-in from different countries). In addition, board minutes could include specific protective language with effect that, despite the best intention to travel to attend the board meeting in person, this was not possible due to travel restrictions.
  • A related point is the application of the offshore substance requirements in certain jurisdictions. For example, funds and GPs resident in Jersey or Guernsey may be unable to satisfy their domestic substance requirements due to the travel restrictions currently in place. In this regard, Revenue Jersey ("RJ") has already responded in providing guidance on the inability to hold quorate board meetings due to the Coronavirus outbreak. Where a company's operating practices have had to be adjusted solely due to the Coronavirus, RJ is unlikely to determine that the company has failed to comply with local substance requirements. Similar local measures are being introduced in other jurisdictions.
  • In addition, companies operating in one country with key personnel confined to another country for prolonged periods of time (especially when performing essential business functions) could create permanent establishments or otherwise raise questions from the tax authority of that other country. As a result, if UK managers find themselves "locked up" in another jurisdiction (either when seconded to a group company or otherwise), they should refrain from making key business decisions while there (for example, negotiating key commercial terms and signing contracts). It is therefore important that relevant supporting and contemporaneous documentation is prepared and kept at the company's registered address. It may also be an appropriate time to revisit any existing group travel policies and remind members of staff about associated tax risks.
  • Individual managers travelling to other jurisdictions for work should also consider their personal tax residence status if, due to travel restrictions, they are forced to remain unexpectedly in another country. For example, in Jersey RJ have provided guidance recognising the Coronavirus pandemic may impact the ability to move freely or require individuals to remain unexpectedly on the Island. Consequently, it is important for these managers to take note of all travel dates and keep records (such as tickets and receipts) to evidence their movements and mitigate any potential challenges in the future. It is also prudent to consider local tax guidance as certain tax authorities (such as HMRC in the UK) have issued guidance on how they intend to treat these cases.

Existing arrangements with tax authorities

Travel restrictions may affect the tax arrangements (such as tax rulings and advanced pricing agreements, or APAs) entered into with tax authorities and so it is vital to check that none of their terms could potentially be breached.

Transfer pricing

Transfer pricing arrangements should be revisited for underlying portfolio businesses that rely on sale of goods or services. For example, a group's intragroup arrangements could be affected if key functions and personnel are expected to be located in a certain country but are prevented due to travel restrictions.

In addition, in cases of businesses that generate losses due to the Coronavirus outbreak, it may be necessary to review existing supply chains where distributors and contract manufacturers are involved (in particular, whether they may be allowed to realise a temporary loss for transfer pricing purposes).

Restructuring at portfolio company levels

The decline in operational activity, coupled with travel restrictions, could have an impact on underlying business valuations. As financial results could decline, some companies may need to restructure their financing arrangements (for example, by converting into equity), which can have tax consequences.

Separately, it will be important to consider whether losses arising at company level can be effectively utilised. This could be by way of transferring losses to other group companies or, potentially, obtaining a step up in the context of a broader reorganisation.

Get in touch

With specialist teams in key international jurisdictions, at Ocorian we provide a full range of fund administration and associated fund services to give our clients clear visibility and confidence in the performance of their investments. View our full range of fund services here or speak with one of our team below to find out how we could support you. 

Further materials that may help you understand, prepare and respond quickly to the legal challenges that the Coronavirus poses can be found in Baker McKenzie's Coronavirus Resource Center, which can be accessed here.

*The information in this article was provided as at 26 March 2020. Please note that this article is designed to provide general information only. It is not offered as advice on any particular matter, or at all, whether it be legal, tax, procedural or other, and it should no t be taken as such. Each of Baker McKenzie and Ocorian expressly disclaimsall liability to any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon the whole or part of the contents of this article. Please do not act or refrain from acting on the basis of any matter contained in this article without seeking specific professional advice on the particular facts and circumstances at issue.

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