Deals and Structuring

Investors often want side-letter comfort that a GP’s activities won’t create a “permanent establishment” (PE) for LPs: being on the wrong side of this rule could result in the investor having to pay tax in the country where the fund is managed.

The concept of a PE is understood globally, but the UK Government has confirmed it is widening the UK definition of PE for chargeable periods beginning on or after 1 January 2026.

The new PE definition would make it harder to rely on option two (adviser only) because the meaning of PE would be extended to include persons who “habitually play the principal role leading to the conclusion of contracts” – potentially encompassing some advisory arrangements.

The Government is not looking to amend the PE definition in the UK’s existing double tax treaties (DTTs) which would mean that taxpayers in countries with a DTT are likely to be able to rely on the current rules. That’s not much comfort: it would be seriously sub-optimal for a GP to have to apply the rules on an investor-by-investor basis based on their specific DTT terms. This will put more pressure on route three – the IME – and so the Government’s proposals to make it more accessible are welcome and important.  Notably, helpful changes should make it a lot less likely that the presence of carried interest arrangements will prevent the IME from applying – in particular, the problematic “20% test” (which, essentially, requires that an investment manager not be entitled to more than 20% of the profits it generates for a non-resident client) is to be abolished.

‘Pro-growth’ changes to National Security deal notifications and merger control

Next, two measures that are motivated by the UK Government’s ‘pro-growth’ agenda, both (mainly) welcome news on the deals front.

First, the scope of sectors requiring mandatory notifications under the National Security and Investment Act (NSIA) is under review. The aim is better targeting of investments that pose a real risk to national security, but there are some extensions too – for example, water will come in-scope for the first time. 

Second, the Competition & Markets Authority (CMA) is under pressure to align with that pro-growth aim, with merger control coming under fire in particular. In response, the CMA has introduced KPIs aimed at quicker clearances for simple deals and a new ‘hybrid’ jurisdictional test to capture no-overlap deals. The CMA has also updated its approach to remedies, in order to increase flexibility and to shift away from its historical preference for structural solutions with increased openness to behavioural ones. In latest news, the Government is moving forward with plans to replace the current Panel model for Phase 2 decision-making with sub-committees of the CMA Board. Whilst the reforms are intended to increase the pace and predictability of decision-making, the plans also raise potential concerns as to whether vital, independent checks and balances may be lost. The Government is also looking to legislate to provide greater certainty on when mergers will be subject to CMA investigation, given the widely-drawn and voluntary nature of the regime (with clarifications to the scope of the jurisdictional ‘share of supply’ and ‘material influence’ tests expected).

Deal parties should be confident in seeking early engagement with the CMA. It’ll be worth those parties making pro-growth and pro-efficiency arguments front-and-centre and they should also consider more innovative behavioural packages as part of the solution where appropriate.  Critically, a matrix of global merger control filings should be a key part of engagement with the CMA, showing where remedies agreed in other countries may be sufficient or where the impact on UK markets may be limited.

Changes to the EU’s securitisation rules

The EU is looking to improve its securitisation rules following the EU Commission’s and (separately) the Loan Market Association’s (LMA) recommendations for reform.

After the 2008 financial crisis, the European and US securitisation rules were tightened up significantly. Europe’s approach made securitisations materially less attractive and its market share shrank.

The Commission’s proposals mark a change of heart, recognising that a well-functioning securitisation regime can allow flows of non-bank capital for investment.

Although the LMA has had some early concerns that the Commission proposals don’t go far enough, any degree of liberalisation will be welcome news to GPs generally and to credit funds in particular. That’s because more securitisations means more investment opportunities and because credit funds have been active issuers under collateralised loan obligations (CLO) – a form of securitisation.  We’ll know more as 2026 progresses.

Fund tokenisation

The FCA has consulted on proposals to encourage tokenisation of authorised funds i.e. to enable fund units to be represented in digital form and for dealing to take place through blockchain-based records.  This is intended to improve efficiency but may, in the longer term, have a real impact on the role of asset managers.  So far, the FCA’s proposals are only directly relevant to managers of authorised funds and we’ll get their final requirements in the first half of 2026. When they land, it will be interesting to see the extent to which authorised funds embrace tokenisation: that might indicate the extent to which there’s likely to be appetite for others too.