This Back to Basics note follows our key concepts briefings, which intend to provide high-level insights regarding funds fundamentals, funds vehicles and operational considerations, available here. Digital innovation is advancing and evolving at a fast pace for investment funds with artificial intelligence (AI) being a particularly high-profile topic.  Managers and investors are increasingly looking ahead to how technology can be applied to their activities and operations. In this briefing we give an insight into AI and how ethics, law and regulation are evolving. The recently approved EU Regulation laying down harmonised rules on artificial intelligence (the “EU AI Act") being one example discussed further below. The legal and regulatory backdrop is evolving from international and other ethical or similar principles. The EU AI Act will be legally binding for those within its scope and can include persons outside the EU. Fund managers and investors will need to consider how they use AI, the steps they take to ensure it is used correctly and have suitable governance procedures.

This Back to Basics note follows our key concepts briefings, which intend to provide high-level insights regarding funds fundamentals, funds vehicles and operational considerations, available here. Digital innovation is advancing and evolving at a fast pace for investment funds with artificial intelligence (AI) being a particularly high-profile topic.  Managers and investors are increasingly looking ahead to how technology can be applied to their activities and operations. In this briefing we give an insight into AI and how ethics, law and regulation are evolving. The recently approved EU Regulation laying down harmonised rules on artificial intelligence (the “EU AI Act") being one example discussed further below. The legal and regulatory backdrop is evolving from international and other ethical or similar principles. The EU AI Act will be legally binding for those within its scope and can include persons outside the EU. Fund managers and investors will need to consider how they use AI, the steps they take to ensure it is used correctly and have suitable governance procedures.

CMS Funds Group Back to Basics briefings intend to provide high level insights regarding funds fundamentals, funds vehicles and operational considerations New briefings are published on a regular basis, covering a specific jurisdiction or topic, and providing basic essential technical explanations.

The UK’s Economic Crime (Transparency and Enforcement) Act 2022 (ECTE Act) originally implemented the Register of Overseas Entities regime in 2022 and as of 21 December 2023 has resulted in over 30,000 registrations at Companies House. In this Focusing on Funds we look at recent and upcoming changes to the Register of Overseas Entities regime made by the Economic Crime and Corporate Transparency Act 2023 (ECCT Act) and the implications for funds and other investors owning real estate in the UK through non-UK legal entities. What is new   The ECCT Act, which forms part of the UK’s ever expanding focus on implementing and enforcing transparency and enforcement legislation relating to economic crime and transparency of ownership, has amended the ECTE Act to expand the Register of Overseas Entities regime to include the following new re­quire­ments:Over­seas entities holding property as nominees must look through to the owners of the land for its  registrable beneficial owners (previously it only looked through to the owners of the nominee). Any legal entity in the overseas entity’s beneficial ownership chain that is a trustee (whether or not a professional trustee) is disclosable as a registrable beneficial owner, together with the supporting trust information. An overseas entity must disclose its principal office (previously it was possible to disclose its registered office instead). Likewise, it must disclose the principal office, rather than the registered office, of any registrable beneficial owner that is a legal entity. Tougher information and compliance requirements including the potential loss of registered status and the ability to deal with land. Other upcoming changes There are a number of other notable changes to the Register of Overseas Entity regime that will be brought in by the ECCT Act, but the Government has not yet indicated when these will come into force. These changes include:A requirement to provide the title number of the relevant property to Companies House – though this information will not be publicly available on the Register.A requirement to disclose the registrable beneficial owner(s) of the overseas entity between the period of 28 February 2022 and 31 January 2023. Further information is set out below. Fund managers and other investors in UK real estate should consider their UK land ownership structures, alongside any upcoming acquisitions and disposals, including certain leases in progress, to understand the implications on their organisations of the Register of Overseas Entities regime, including the latest and upcoming changes. . The Register of Overseas Entities – a recap and its implications The Register of Overseas Entities (the Register) is a separate public register at Companies House for non-UK legal entities (overseas entities) that directly own or acquire qualifying UK real estate. It was established by the ECTE Act and launched on 1 August 2022. The relevant overseas entity is required to give comprehensive information about itself, its ‘registrable beneficial owner(s)’ (including, where the registrable beneficial owner is a trustee, information about the trust) and, in some circumstances, its managing officers. UK companies (and other UK entities)  have to disclose their beneficial owner on a separate register under the People with Significant Control (PSC) regime. Information contained on the Register is for the most part available to the public. Overseas entities owning UK real estate (in particular, property registered since 1 January 1999 in England and Wales and since December 2014 in Scotland), or that have made disposals of UK real estate since 28 February 2022, originally had six months since 1 August 2022 to register on the Register. Overseas entities seeking to acquire UK real estate (freeholds and grants of leases of more than seven years) need to be registered on the Register at Companies House before an acquisition can be registered at the Land Registry.  For further detail regarding the implications of the Register for UK real estate transactions, including Land Registry requirements, see our Law Now “Important deadline imminent for Economic Crime Act”. Overseas entities on the Register are required to annually confirm and, when relevant, update their information on the Register, and can apply to be removed from the Register when they cease to hold qualifying UK real estate. For more information on the updating duty, see our Law Now “Be aware of the updating requirements for overseas entities at Companies House”. There are fines and criminal penalties for non-compliance – and non-compliance will seriously impact an overseas entity’s ability to acquire, sell, let or charge UK real estate. Scotland has its own transparency regime, the Register of Persons Holding Controlled Interests in Land, that applies there in addition to the Register of Overseas Entities regime. For more information on the Scottish regime, see our Law Now “Register of Persons Holding a Controlled Interest in Land – (cms-lawnow. com)”. Overseas entity The obligation to register under the ECTE Act is on the ‘overseas entity’, which is a body corporate, partnership or other entity that (in each case) is a legal person governed by non-UK law. The overseas entity needs to provide specific information about itself, any ‘registrable beneficial owners’ (including, where the registrable beneficial owner is a trustee, information about the trust) and, in some cases, its managing officers to Companies House as part of its application to register on the Register. The information contained in the application for registration must be verified by a registered verifier. Information provided in the annual update statement must also be verified. Registrable beneficial owner(s) Overseas entities that register on the Register will need to identify their ‘registrable beneficial owner(s)’. A beneficial owner is an individual, a legal entity or a government or public authority (X), who meets any of the following conditions in relation to the overseas entity (Y):

Updated on May 2022 Investment vehicle Singapore Limited Part­ner­shipSinga­pore Variable Capital Company 1. Form Singapore Limited Partnership Limited Partnership Singapore Variable Capital Company Corporate...

This Back to Basics note follows our key concepts briefings, which intend to provide high-level insights regarding funds fundamentals, funds vehicles and operational considerations, available here. In this Back to Basics, we look at UK Real Estate Investment Trusts (“REITs”), including their requirements, benefits and growing use for fund structures and investment by institutional type investors in UK real estate.  Background and relevance Recent changes in UK tax legislation – most recently in the Finance Act 2024 – as well as changing investor attitudes, have bolstered investor and manager appetite for UK REITs as part of a fund or as holding vehicles (“Private REITs”). They were originally introduced in 2007 for listed companies but can now be more “private” in nature and it is no longer necessary for the REIT to be traded or listed on a recognised stock exchange if the relevant ownership requirements are met. What is a UK REIT? A UK REIT is a UK tax resident company limited by shares (or a group of companies of which the principal company is a UK tax resident) that has an HMRC approved tax status for its property rental business and associated investment in real estate assets. What are the key benefits? Prominent benefits of using UK Private REITs to hold and invest in UK property include:tax efficient structure – see Tax benefits further below;use for real estate – this can be single or multi sector asset classes and includes student accommodation, private rented sector and life sciences;private REITs can be used by funds and institutional investors – see Private REIT structures below;possible use for a single asset – a REIT can hold a single commercial property of £20 million or more; and­flex­ib­il­ity – a UK REIT can be an overseas entity, provided it is a UK tax resident, and can be a group structure. It can be managed internally or externally. REITs are also permitted to hold non‑UK assets, which will be subject to local taxes, and to carry out a limited amount of non‑real estate investment activity. REIT requirements Set out below is a diagram illustrating some of the key “qualifying conditions” of RE­ITs:me­di­umThere are other conditions such as for financing, maximum holdings of shares by single corporates as well as continuing requirements. If these are not met, a tax charge can arise, or even loss of REIT status. Tax benefits A key incentive for using Private REITs is the tax efficiencies that are offered. These efficiencies include:no UK corporation tax is payable on tax derived from the property rental business: this has particularly become more favourable for investors following the uplift in main rate corporation tax from 19% to 25% in 2023. It is required to distribute at least 90% of its rental income profits;no capital gains tax is payable on profits arising from its property investments: this includes gains on the sale of qualifying UK property rich com­pan­ies;abil­ity to eliminate tax on latent gains: REITs can eliminate latent gains in property holding companies they acquire that hold UK property and can sell such property holding companies free of latent gains. This is highly desirable for purchasers when bidding for property holding companies at a gain;tax is levied at the shareholder level than at the REIT level itself: this enables certain institutional investors to claim exemptions on profits received from the property;a company acquiring REIT status is not subject to any additional tax charges for becoming a REIT; andability to reclaim withheld tax: while distributions out of its ring-fenced profits (otherwise referred to as property income distributions (“PIDs”)) made by the REIT are subject to a 20% withholding tax, these payments can be made gross where a shareholder is a UK corporate, pension fund, local authority or charity. UK companies will be liable to corporation tax on the PIDs at the current rate of UK corporation tax. Non-resident investors may be eligible to a reduced (or nil) withholding tax rate. Recent legislative amendments of REIT law Further changes to the REIT regime have recently been made by successive Finance Acts, with the most recent in the Finance Act 2024. Many of the recent amendments seek to reduce barriers to entry which we anticipate will heighten investor interest and participation in the REIT regime and create greater flexibility in fund structuring as it can accommodate REIT subsidiaries. These include:amending the non-close condition, which applies where a company is only close because it has an institutional investor as a participator, so that it is possible to trace through the intermediate holding companies to an institutional investor which is an ultimate beneficial own­er; an­dal­low­ing more fund structures to meet the “genuine diversity of ownership” condition, by allowing the fund structure to be looked at as a whole, rather than just the investing vehicle. The amendments made in the Finance Act 2024 include a change to the definition of “institutional investors” such that authorised unit trusts, open-ended investment companies and collective investment scheme limited partnerships must meet either:a “genuine diversity of ownership” condition (i.e. it is widely marketed) can be fulfilled by looking at the fund structure as a whole rather than just the investing vehicle; ora “not a close company” condition (i.e. not controlled by 5 or fewer participators). Private REIT structures It is possible for institutional investors to hold the Private REIT directly or through a fund structure if the relevant investor and other requirements are met (see 70% institutional ownership requirement in the diagram and proposed legislative changes above). Institutional investors include relevant authorised unit trust schemes, pension schemes, sovereign wealth funds, open-ended investment companies, collective investment scheme limited partnerships, other UK REITs (or overseas REIT equivalents), UK charities and certain insurance companies. Private REITs often do not need a listing or to be traded on a recognised stock exchange. An example of a UK Private REIT structure set up as a fund is provided below. medium Luxembourg vehicles The new Luxembourg-UK double tax treaty (as explored in our separate briefing (The new Luxembourg-UK double tax treaty: key points for investors in UK real estate (cms-lawnow. com))) with its new taxing right taking effect from 1 January 2024 in respect of withholding tax, and from 6 April 2024 applying to other taxes on income and gains in Luxembourg, is anticipated to have a knock-on effect on how existing UK real estate holdings should be most effectively structured where shares or interests are held by Luxembourg holding structures. This Luxembourg-UK double tax treaty, in conjunction with the UK corporation tax increasing to 25% on 1 April 2023, is expected to propel UK real estate investors further in considering the use of Private REITs in their own structuring.  Conclusion If you would like to discuss public and private REITs and their usage in funds, joint ventures or other investment structures, please contact a member of the CMS UK Funds Group. For further information on our REITs expertise, please see our separate brochure (CMS REITs | Corporate | United Kingdom | International law firm CMS).

This Back to Basics note follows our key concepts briefings, which intend to provide high-level insights regarding funds fundamentals, funds vehicles and operational considerations, available here. In this Back to Basics, we look at UK Real Estate Investment Trusts (“REITs”), including their requirements, benefits and growing use for fund structures and investment by institutional type investors in UK real estate.  Background and relevance Recent changes in UK tax legislation – most recently in the Finance Act 2024 – as well as changing investor attitudes, have bolstered investor and manager appetite for UK REITs as part of a fund or as holding vehicles (“Private REITs”). They were originally introduced in 2007 for listed companies but can now be more “private” in nature and it is no longer necessary for the REIT to be traded or listed on a recognised stock exchange if the relevant ownership requirements are met. What is a UK REIT? A UK REIT is a UK tax resident company limited by shares (or a group of companies of which the principal company is a UK tax resident) that has an HMRC approved tax status for its property rental business and associated investment in real estate assets. What are the key benefits? Prominent benefits of using UK Private REITs to hold and invest in UK property include:tax efficient structure – see Tax benefits further below;use for real estate – this can be single or multi sector asset classes and includes student accommodation, private rented sector and life sciences;private REITs can be used by funds and institutional investors – see Private REIT structures below;possible use for a single asset – a REIT can hold a single commercial property of £20 million or more; and­flex­ib­il­ity – a UK REIT can be an overseas entity, provided it is a UK tax resident, and can be a group structure. It can be managed internally or externally. REITs are also permitted to hold non‑UK assets, which will be subject to local taxes, and to carry out a limited amount of non‑real estate investment activity. REIT requirements Set out below is a diagram illustrating some of the key “qualifying conditions” of RE­ITs:me­di­umThere are other conditions such as for financing, maximum holdings of shares by single corporates as well as continuing requirements. If these are not met, a tax charge can arise, or even loss of REIT status. Tax benefits A key incentive for using Private REITs is the tax efficiencies that are offered. These efficiencies include:no UK corporation tax is payable on tax derived from the property rental business: this has particularly become more favourable for investors following the uplift in main rate corporation tax from 19% to 25% in 2023. It is required to distribute at least 90% of its rental income profits;no capital gains tax is payable on profits arising from its property investments: this includes gains on the sale of qualifying UK property rich com­pan­ies;abil­ity to eliminate tax on latent gains: REITs can eliminate latent gains in property holding companies they acquire that hold UK property and can sell such property holding companies free of latent gains. This is highly desirable for purchasers when bidding for property holding companies at a gain;tax is levied at the shareholder level than at the REIT level itself: this enables certain institutional investors to claim exemptions on profits received from the property;a company acquiring REIT status is not subject to any additional tax charges for becoming a REIT; andability to reclaim withheld tax: while distributions out of its ring-fenced profits (otherwise referred to as property income distributions (“PIDs”)) made by the REIT are subject to a 20% withholding tax, these payments can be made gross where a shareholder is a UK corporate, pension fund, local authority or charity. UK companies will be liable to corporation tax on the PIDs at the current rate of UK corporation tax. Non-resident investors may be eligible to a reduced (or nil) withholding tax rate. Recent legislative amendments of REIT law Further changes to the REIT regime have recently been made by successive Finance Acts, with the most recent in the Finance Act 2024. Many of the recent amendments seek to reduce barriers to entry which we anticipate will heighten investor interest and participation in the REIT regime and create greater flexibility in fund structuring as it can accommodate REIT subsidiaries. These include:amending the non-close condition, which applies where a company is only close because it has an institutional investor as a participator, so that it is possible to trace through the intermediate holding companies to an institutional investor which is an ultimate beneficial own­er; an­dal­low­ing more fund structures to meet the “genuine diversity of ownership” condition, by allowing the fund structure to be looked at as a whole, rather than just the investing vehicle. The amendments made in the Finance Act 2024 include a change to the definition of “institutional investors” such that authorised unit trusts, open-ended investment companies and collective investment scheme limited partnerships must meet either:a “genuine diversity of ownership” condition (i.e. it is widely marketed) can be fulfilled by looking at the fund structure as a whole rather than just the investing vehicle; ora “not a close company” condition (i.e. not controlled by 5 or fewer participators). Private REIT structures It is possible for institutional investors to hold the Private REIT directly or through a fund structure if the relevant investor and other requirements are met (see 70% institutional ownership requirement in the diagram and proposed legislative changes above). Institutional investors include relevant authorised unit trust schemes, pension schemes, sovereign wealth funds, open-ended investment companies, collective investment scheme limited partnerships, other UK REITs (or overseas REIT equivalents), UK charities and certain insurance companies. Private REITs often do not need a listing or to be traded on a recognised stock exchange. An example of a UK Private REIT structure set up as a fund is provided below. medium Luxembourg vehicles The new Luxembourg-UK double tax treaty (as explored in our separate briefing (The new Luxembourg-UK double tax treaty: key points for investors in UK real estate (cms-lawnow. com))) with its new taxing right taking effect from 1 January 2024 in respect of withholding tax, and from 6 April 2024 applying to other taxes on income and gains in Luxembourg, is anticipated to have a knock-on effect on how existing UK real estate holdings should be most effectively structured where shares or interests are held by Luxembourg holding structures. This Luxembourg-UK double tax treaty, in conjunction with the UK corporation tax increasing to 25% on 1 April 2023, is expected to propel UK real estate investors further in considering the use of Private REITs in their own structuring.  Conclusion If you would like to discuss public and private REITs and their usage in funds, joint ventures or other investment structures, please contact a member of the CMS UK Funds Group. For further information on our REITs expertise, please see our separate brochure (CMS REITs | Corporate | United Kingdom | International law firm CMS).

CMS is the No.1 law firm for REITs.  The CMS REITs team includes specialists in the following expertise areas:Real EstateCorporate Fin­an­ceTaxReg­u­lat­ory­Bank­ing Changes in UK tax law and investor preference...