02.28 – Investment Entity

The UK Regulations mirror the final U.S. Regulations and set out that an entity meets the definition of an Investment Entity if it, the entity, falls within the scope of either (i) or (ii) below:

(i) An investment entity within the meaning of the Agreement.

An entity falls within this category if it “conducts as a business” (see below), for or on behalf of a customer (for example an account holder) one or more of the following activities:

  • trading in money market instruments (cheques, bills, certificates of
    deposit, derivatives, etc.);
  • foreign exchange;
  • interest rate and index instruments;
  • transferable securities and commodity futures trading;
  • individual and collective portfolio management;
  • otherwise investing, administering or managing funds or money on behalf of other persons.

The entity will be regarded as conducting these activities as a business if the entity’s gross income attributable to such activities is equal to or exceeds 50 percent of the entity’s gross income during the shorter of:

  • The three-year period ending on 31 December of the year preceding the year in which the determination is made; or
  • The period during which the entity has been in existence.

(ii) it meets the financial assets test (see below) AND is managed by a Financial Institution.

An Entity meets the financial assets test if the entity’s gross income is primarily attributable to investing, reinvesting, or trading in financial assets (“the financial assets test”).

The meaning of what is a “financial asset” is set out in the UK Regulations and includes:

  • any asset capable of being the subject matter of a transaction that is an “investment transaction” within the meaning of regulation 14F of Part 2B of the Authorised Investment Funds (Tax) Regulations 2006,
  • an Insurance Contract or an Annuity Contract,
  • commodities; or
  • a derivative contract within the meaning of Part 7 of the Corporation Tax Acts 2009

Therefore, an Investment Entity whose assets consist of non-debt direct interests in real property or land, even if managed by another Investment Entity would not be an Investment Entity.

An Investment Entity meets the “financial assets test” if the entity’s gross income attributable to such activities is equal to or exceeds 50 percent of the entity’s gross income during the shorter of:

  • The three-year period ending on 31 December of the year preceding the year in which the determination is made; or
  • The period during which the entity has been in existence.

Where an entity’s gross income is primarily attributable to investing, reinvesting, or trading in financial assets and that entity is managed by a Financial Institution that performs any of the activities, either directly or through another third party service provider, listed above, the managed entity will still be regarded as an Investment Entity.

Further guidance on when another Financial Institution is managing the assets on behalf of the entity can be found in section 2.36.
Where an entity is managed by an individual, the managed entity will not be an Investment Entity because an individual cannot be an Investment Entity.
Section 2.32 provides further guidance on how the rules apply to Collective Investment Schemes.
Section 2.36 provides further guidance on how the rules apply to Trusts.