Scottish and English limited partnerships do you know the facts?

March 2010 www.mms.co.uk/knowledge

Although the law in relation to limited partnerships ("LPs") has been in existence for over 100 years, the flexibility and efficiency that LPs provide across a range of structures and asset classes continues to make them an attractive vehicle. A Scottish LP's separate legal personality makes it more versatile still. What is a limited partnership? An LP is a partnership between at least one general partner, who has unlimited liability for the debts and obligations of the LP, and one or more limited partners who contribute capital to the LP (either by contributing cash or property). Top 5 attractions 1. Limited liability One of the main advantages of LPs is that, provided they do not take part in the management of the LP, the liability of each of the limited partners is capped at the amount of its contribution to the LP, which means that limited partners benefit from the same limited liability status as shareholders in a limited company. 2. Centralised management There is a legal requirement that a limited partner cannot take part in the management of the LP and doing so would result in the limited partner being treated as a general partner with unlimited liability during the period of noncompliance. However, this legal requirement makes LPs ideal vehicles where there are multiple investors and it is more efficient to centralise management in the hands of the general partner or a nominated manager.

LP structures allow the remuneration payable to the management to be dealt with in a tax efficient manner through the structuring of such remuneration as a "priority profit share" payable to the general partner. It also allows the management team to be incentivised in a tax efficient manner through its entitlement to a "carried interest" in the profits of the LP, which provides a significant incentive to increase the return on investments. The carried interest profit share is often routed through a Scottish LP acting as a limited partner holding a distinct interest in the underlying LP. 3. Flexibility LPs are flexible vehicles which can be tailored for use both on and offshore. In recent years, LPs have been used in a number of areas, including: in real estate transactions, for example, as vehicles to house real estate assets in the private equity, infrastructure and venture capital arenas, for example, in investment fund structures and carried interest arrangements in Lloyd's of London structures where the LPs underwrite contracts of insurance and provide a blocker between individual investors and the insurance market to house energy projects in developing nations where investors provide funding but do not wish to participate in management

Maclay Murray & Spens LLP is a limited liability partnership incorporated in Scotland with registered number SO300744 and having its registered office at 151 St Vincent Street, Glasgow G2 5NJ. Maclay Murray & Spens LLP is a firm of solicitors regulated by the Law Society of Scotland and the Solicitors Regulation Authority. A list of members is available for inspection at the registered office and other offices. This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.

Aberdeen 66 Queens Road AB15 4YE 01224 356 130 Fax 01224 356 131 Edinburgh Quartermile One 15 Lauriston Place EH3 9EP 0131 228 7000 Fax 0131 228 7001 Glasgow 151 St Vincent Street G2 5NJ 0141 248 5011 Fax 0141 248 5819

London One London Wall EC2Y 5AB 020 7002 8500 Fax 020 7002 8501 Brussels Scotland House Rond-Point Schuman 6 B-1040 00322 282 8415 Fax 00322 282 8418

in cross border intra-group reorganisations as part of tax planning/mitigation as vehicles through which assets can be transferred into pension schemes in a tax efficient manner. 4. Tax transparency LPs are broadly transparent for UK direct tax purposes and are not treated as separate taxable entities by HMRC. UK tax residents who are partners in LPs are directly assessed to tax on their share of the income or gains of the LP and therefore are not subject to multiple layers of UK taxation. Partners who are not UK resident or ordinarily resident will only pay UK tax on UK source income, including their share of profits arising in the UK if the partnership carries on a trade in the UK. 5. Separate legal personality Scottish LPs can be distinguished from English LPs as they benefit from having legal personality separate from that of their partners. This means that a Scottish LP can raise legal actions, be sued in its own name and own property in its own name. In addition, as an entity with separate legal personality, a Scottish LP is likely to be treated in certain jurisdictions as a foreign entity distinct from its partners, which could bring tax benefits which are not available to LPs incorporated in other jurisdictions.

In the USA, partners in a Scottish LP can choose to make "check-the-box" elections in respect of the LP, which allows the partners to decide whether the LP is taxed as a partnership or a corporation. Such flexibility of treatment in overseas jurisdictions could provide significant benefits within international groups and allow efficient tax planning across jurisdictions even where the group has no other connection to Scotland. Note that flexibility, tax transparency and separate legal personality are all features of Scottish partnerships, limited or not. If limited liability is not critical to your structuring, a Scottish general partnership may be a more attractive vehicle. Regulatory issues LPs may be treated as a collective investment scheme under the Financial Services and Markets Act 2000 and will therefore require to be established, operated and wound up by a person duly authorised by the UK Financial Services Authority. There are exemptions, for example where each of the partners is a body corporate within the same group as the general partner, but specific advice should be sought in this complex area. In the event that an LP is classified as a collective investment scheme, there are particular restrictions under the financial promotion regime as to how the LP interests may be promoted. Again, this is a complex area in which advice should be sought.

Our expertise Maclay Murray & Spens LLP has built up considerable experience over a sustained period in advising on, establishing and operating LPs, Scottish and English, across a range of structures, asset classes and jurisdictions. Our LPs team, comprised of qualified lawyers across our Corporate, Property, Tax and Regulatory departments, has the capability and resources to service your needs in this area. Contact us For more information, please contact: Michael Livingston Partner Direct Line 020 7002 8535/0131 228 7164 Email michael.livingston@mms.co.uk Guy Norfolk Partner Direct Line 020 7002 8568 Email guy.norfolk@mms.co.uk David Young Partner Direct Line 0131 2278 7179 Email david.young@mms.co.uk If you would like to subscribe to any of our e-updates or newsletters please register at: www.mms.co.uk/knowledge