Trends in private equity and credit funds (2023)

Wednesday 1 March 2023

Michael Gallagher

Walkers (Ireland), Dublin

Report on the session of the Taxation Section at the 12th Annual London Finance and Capital Markets Conference in London

Tuesday 17 January 2023

Session Chair

Brenda Coleman Ropes & Gray, London


Justin R Williams Akin Gump Strauss Hauer & Feld, New York

Francesco Capitta Facchini Rossi Michelutti Studio Legale Tributario, Milan

Pieternel Verhoeven - van den Brink NautaDutilh, Rotterdam

Ayzo Eysinga AKD Benelux, Luxembourg

Albert Collado Garrigues, Barcelona


The private equity and credit funds panel addressed the question of whether private equity and venture capital structures are under siege in the respective jurisdictions of the panellists. The panel, which was chaired by Brenda Coleman, focused on the following topics:

  • challenges and opportunities at portfolio company level;
  • challenges and opportunities at holding company (HoldCo) level;
  • challenges and opportunities at fund structure level;
  • challenges and opportunities at manager level; and
  • carried interest.

Panel discussion

Portfolio company level

Justin R Williams explained that the United States corporate tax rate was lowered to 21 per cent as part of the 2018 Tax Cuts and Jobs Act (TJCA), which impacted portfolio companies. The TCJA also overhauled the US controlled foreign company (CFC) rules and introduced the global intangible low-taxed income (GILTI).

Francesco Capitta explained that, in Italy, there is an exemption for European Union/European Economic Area (EEA) regulated funds from Italian tax on dividends from Italian companies and capital gains from the sale of shares in Italian companies. He referred to an Italian Supreme Court ruling in July 2022, which held that the application of 15 per cent withholding tax on dividends payable to a US fund was discriminatory due to the EU principle of free movement of capital.

Albert Collado explained that Spain has an anti-abuse provision, which is applicable to dividends and royalties paid under the scope of the EU Parent/Subsidiary Directive. There was a presumption of fraud where the majority of voting rights were ultimately controlled by non-EU shareholders. In 2021, a Spanish court held that the presumption of fraud is contrary to the EU principle of freedom of establishment.

Collado noted that beneficial ownership is not a concept in Spanish law, but is imported from double tax treaties, EU case law and the EU Parent/Subsidiary Directive. Following the judgments of the Court of Justice of the EU in the 'Danish' cases in 2019, the Spanish Central Administrative Court confirmed that beneficial ownership is a material requirement in order to apply an exemption. In 2021, the Spanish courts (in the 'Qatar' case) applied a triple test, looking to substance, beneficial ownership and economic reasons for using a Luxembourg HoldCo company to receive dividends from a Spanish entity.

Pieternel Verhoeven - van den Brink explained that there is no capital gains tax (CGT) at portfolio level in the Netherlands, although it can arise where an arrangement is artificial and designed to avoid Dutch personal income tax.

HoldCo level

Ayzo Eysinga explained that, in Luxembourg, HoldCos are common for private equity and credit fund structures. Tax neutrality can be achieved, but substance is an issue. For example, clients must come to Luxembourg at least four times a year for meetings to ensure that there is sufficient substance.

Coleman explained that the qualifying asset HoldCo (QAHC) was introduced in the United Kingdom in April 2022. It provides for a full CGT exemption, and interest and dividends can be paid gross without the need for a listed note. Coleman noted that one advantage of a QAHC over a Luxembourg société à responsibilité limitée (SARL) is that a return on non-performing loans can be sheltered through the use of a profit participating loan/notes. At least 70 per cent of the shares in a QAHC must be held by 'good' investors, including certain institutional investors and qualifying funds. The QAHC is aimed at the investment fund industry, and its main activity must be the carrying on of an investment business. She noted that circa 100 applications for QAHCs have been submitted to date.

In the Netherlands, a HoldCo can advance a shareholder loan to a portfolio company, which can create deductible interest expenses. The Netherlands has a participation exemption though Bermuda and Cayman investors that is subject to dividend withholding tax. Withholding tax on interest applies to payments made to a related party (50 per cent interest) in a low-tax or non-cooperative jurisdiction.

Williams explained that, for US tax purposes, HoldCos are often 'checked open' for US federal income tax purposes. CFC rules impute passive income of non-US companies to US shareholders. The TCJA expanded the reach of the CFC rules to include a greater than ten per cent direct or indirect owner by vote or value, rather than the previous vote and value.

Fund structure level

Eysinga explained that, in Luxembourg, transparent partnerships are common fund structures. DTAs aren't applied directly to transparent funds, and you look though the entity to see if its investors have treaty protection. Anti-hybrid rules are an issue because Italy, Australia, Japan, France, Lithuania, South Korea and the US all see Luxembourg special limited partnerships (Lux SCSps) as opaque.

Verhoeven - van den Brink noted that, in 2024, the Netherlands will introduce new entity qualification rules that should limit the number of hybrid mismatches.

Collado explained that non-resident entities qualify as transparent in Spain if their legal nature is identical or similar to that of Spanish transparent entities.

Williams explained that, in the US, investment fund audits are expected to increase. In 2015, audit rules changed and shifted audit-related liability from partners to a partnership.

Manager level

Williams mentioned that US-based investment funds often set up their managers as limited partnerships and the principals as partners to ensure that the partners' income is excluded from self-employment tax and from a 3.8 per cent 'net investment income' tax.

Capitta explained that, in Italy, foreign private equity structures were targeted by tax authorities for creating an Italian permanent establishment (PE) of the foreign fund. A new investment manager exemption is being introduced that contains a presumption of no PE if certain criteria are met, including that the manager must not sit on the boards of directors of subsidiaries.

Carried interest

Williams explained that, in the US, the TCJA retained a preferential long-term capital gains rate of 23.8 per cent on fund investments, but introduced a new set of rules that require a greater than three-year holding period.

Capitta noted that, in Italy, carried interest is subject to a 26 per cent rate of taxation if three requirements are met: (1) minimum investment of one per cent of the net equity; (2) investors obtain a minimum rate of return; and (3) minimum holding period of five years.

Collado explained that a new carried interest regime was introduced in Spain recently, which characterised carried interest as employment income, with a 50 per cent exemption provided that: (1) the manager manages qualifying funds, such as a Spanish alternative investment fund (AIF) private equity fund; (2) investors obtain a minimum profitability threshold; and (3) the shares/economic rights must be held for at least five years.


Williams noted there is a perception that there have been few changes to US tax rules recently. This is not true as the TCJA and Inflation Reduction Act 2022 have brought significant changes to the US tax system, which include moving the US to a territorial regime.

Eysinga noted that, in Luxembourg, the HoldCo is different to what it used to be due to base erosion and profit shifting (BEPS) and the Anti-Tax Avoidance Directive (ATAD). Now, HoldCos cannot have a tax driver. While Eysinga was not in favour of ATAD III, he noted that it is likely to set a standard for substance, which is welcome.

Collado noted that, in Spain, a number of recent cases have applied beneficial ownership tests when determining the availability of treaty benefits.

Capitta noted that, in Italy, the new investment manager exemption ignores the practical reality that the manager will usually seek board seats in its subsidiaries or portfolio companies.

Verhoeven - van den Brink noted that new Dutch qualification rules should apply from 2024, with legislation expected in 2023.

Coleman noted that the QAHC could be very useful for distressed debt transactions and it may make sense for a manger to use it rather than a Luxembourg HoldCo if the manager has substance in the UK.