Lawyers are calling for a change in tax law in order to make a success of the U.K. regulator's proposed opening up of hedge funds to high-net-worth individuals. Moving hedge funds onshore should increase the number of funds and subsequently provide a boost to the over-the-counter derivatives markets, noted Matthew Judd, partner at Clifford Chance in London.
John Langan, counsel at Bryan Cave in London, said tax legislation must be reformed at the same time as introducing regulation to allow hedge funds to come onshore. Comments on the Financial Services Authority's proposal are due in at the end of the month.
The Inland Revenue, the U.K.'s tax authority, has asked the industry for ideas on reforming the taxation of hedge funds, said Alistair Nash, tax director in the investment management and funds group at KPMG in London. He added that a solution would be to treat hedge funds as investment, rather than trading, companies.
The disadvantage of being characterized as a trading company is that they have to pay income tax on each trade whereas regulated investment companies operate under a less onerous tax regime. Funds of funds are also likely to be affected since they would have pay tax when they sell units in the underlying funds, noted Langan.
Judd said that Germany, Luxembourg and France have all put forward similar proposals.
