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’Donnell Norton Rose Fulbright LLP 24 June 2014

Introduction Imogen Garner

Introduction Partnership tax changes 2014 Remuneration rules: AIFMD & UCITS V The pay-out process Limited Liability Partnership agreements 3

Partnership tax changes 2014 Andrew Roycroft

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) 5

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 6

Remuneration rules: AIFMD & UCITS V Kennedy 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 process Louise Dent

13 Pay-out process components 50% Retained units Performance adjustment 40% Deferral

14 Example LLP 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

What does the pay-out process apply to? 15 Code staff Categories of staff who have a “material impact on the risk profiles of the AIFM or the AIFs managed” Individual disapplication 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 Remuneration Pro-rata return on investment vs remuneration Variable remuneration 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 units Which 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 AIFMs LLP structures Net or gross of tax Company structures Period “appropriate in the life cycle/redemption policy of fund” Vest no faster than time pro-rated Conditions

18 Performance adjustment Malus Unvested deferred elements Instruments or cash Clawback Post-receipt Upfront and deferred elements

Limited Liability Partnership agreements Mike Newell & Claire O’Donnell

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..? 20

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 Garner Financial services - London Partner Norton Rose Fulbright LLP +44 (0) Andrew Roycroft Tax - London Senior Associate Norton Rose Fulbright LLP +44 (0) 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.” 21

Key contacts in London Louise Dent Tax and incentives - London Senior Associate Norton Rose Fulbright LLP +44 (0) Kennedy Masterton-Smith Financial services - London Senior Associate Norton Rose Fulbright LLP +44 (0) kennedy.masterton- 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. 22 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.

Key contacts in London Mike Newell Corporate - London Partner Norton Rose Fulbright LLP +44 (0) Claire O’Donnell Corporate - London Of Counsel Norton Rose Fulbright LLP +44 (0) 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 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

AIFMD expert: Our guide to the AIFMD 24

Global coverage 25

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