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Private Fund Limited Partnerships (PFLPs)

The Treasury has recently published the responses to its Consultation about proposed changes to the existing partnership legislation by way of a Legislative Reform Order. The proposals have been broadly welcomed by the Private Equity and Venture Capital industry and it is anticipated that the legislation will be enacted within the next year. Two-thirds of the money raised in Europe for Private Equity and Venture Capital Funds last year was raised in the UK and the changes are being implemented to try and ensure that the UK remains competitive as the jurisdiction of choice for establishing this type of fund. The changes are all fairly technical and the main themes may be summarised as follows:

What is a PFLP?

A PFLP is essentially a “Collective Investment Scheme” within the meaning of the Financial Services and Markets Act.

General Partner Certificate

HM Treasury has accepted that it should be the General Partner and not the solicitor responsible for setting up the Fund who should be responsible for providing a Certificate of Compliance confirming that the Fund meets the requirements for a PFLP.

Transition Period

An existing Limited Partnership will always have the option of applying for PFLP status if it fulfils the required criteria. However, when a Partnership becomes a PFLP, it will not be able to return to Limited Partnership status. 

White List

There is some confusion about what constitutes “taking part in the management of the partnership business” with the potential for a Limited Partner to unwittingly cross the line and have unlimited liability.

The new regulations will accordingly contain a “White List” of permitted activities. The list will not be exhaustive but it should help to clarify a difficult area.

Capital Contributions

There will no longer be a requirement for Limited Partners to make a Capital Contribution as Investors generally make most of their Commitments by way of Loan. However, it will still be possible to make Capital Contributions although they will no longer need to be disclosed in the Register.

This gives rise to a wider issue about the structuring of Carried Interest provisions. Typically the entitlement to Carried Interest is established by enabling the Founder Partner to subscribe for a Capital Contribution without being obliged to make a Loan Commitment. This whole area will need careful consideration to ensure that standard Carried Interest provisions will still qualify for Capital Gains Tax treatment and also to consider whether Carried Interest provisions could be drafted into a Limited Partnership Agreement without a conventional capital structure.

Winding Up

Specific provisions will be included to enable to Limited Partners, without incurring any liability in the process, to appoint a third party to wind up the partnership on their behalf.

Registration of Limited Partnership

The current requirement to register the general nature and term of the Partnership will be removed.

Gazette Notices

The current requirement to advertise the assignment of an interest in a PFLP will be removed but it will remain in the case of a General Partner becoming a Limited Partner.

Exemption from Statutory Duties

The Limited Partners in a PFLP will be exempt from certain obligations under the Partnership Act 1890 (duty to render accounts and information to other Partners and to account for profits made in competing businesses) but will remain liable under Section 29 (obligation to account to the Partnership for any benefit derived by him from any transaction concerning the Partnership or from any use by him of the Partnership, property name or business connection).

Legal Personality

Partnerships in England, Wales and Northern Ireland do not have a separate legal personality unlike Scotland where a Partnership is treated as a separate legal persona. This important issue will require primary legislation to change it and it remains the subject of ongoing consultation.

Tax on Carried Interest (Finance Bill 2016)

In addition to the foregoing proposals, there are detailed provisions in the current Finance Bill relating to the taxation of Carried Interest targeted at trading gains with a short holding period. The provisions are quite complex but they should not impact on standard Carried Interest provisions for Venture Capital Funds which are investing in bona fide trading businesses whose Carried Interest provisions operate on a whole of fund basis and are calculated only at the end of the life of the Fund.

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