Partnership Vehicles Come Under Scrutiny

Many investment funds in the alternatives sector make use of partnership structures, in particular in the private equity, infrastructure and non-core real estate sectors. The tax transparency and general flexibility of such vehicles lend themselves well to the operating models and commercial terms of such funds.

The release of the Panama Papers in April 2016, however, brought to light the use of Scottish limited partnerships as components in certain tax shelter and money laundering arrangements. Since then there has been considerable interest in the UK, and in particular the Scottish press, regarding the use and misuse of such vehicles. The UK Government has conducted extensive investigations over the course of 2017 to seek to understand this phenomenon further and also to understand better the range of legitimate uses of such vehicles.

Within the UK there is a difference in the juridical nature of partnerships, with Scottish partnerships having "legal entity" status but English Partnerships constituting associations without entity status. In the funds sector a combination of such partnerships are often usefully used in layered structures to ensure that a proper separation is achieved between the separate layers and a number of classic fund formation jurisdictions have recognised the utility of these features and have introduced a similar range of partnership vehicles, with and without entity status. Aside from this distinction (and a slightly more stringent disclosure regime for SLPs noted below) there is no substantive difference in the tax or regulatory treatment of partnerships in the UK. However, as noted below, it seems that in some other jurisdictions authorities have tended not to look behind the entity status of Scottish partnerships and this has facilitated their use in disguising ownership of illegally sourced assets.

In April 2018 BEIS published a consultation paper seeking views on a number of reform proposals intended to stem this misuse. The consultation paper reported that there was evidence of recent misuse of SLPs. There was, between 2011 and 2016 a marked spike in the formation of such vehicles which seems only partially explained by new legitimate uses and it seems possible that unscrupulous parties were actively marketing their inappropriate use. This trend appears now to have fallen off somewhat, and one may speculate that increased scrutiny has reduced attractiveness.

However, in the consultation paper the Government...