Tomorrow, Scotland votes in a referendum on independence.  The  outcome of the vote is far from certain, but whichever way the vote  goes, there will be significant long-term economic, political, tax and  legal impacts, including impacts (1) on private equity firms and other  managers of alternative investment funds (“AIFs”) doing business in  Scotland and (2) on AIFs (or their general partners) organized under  Scottish law.

It is far too early for us to discuss any of these issues in detail.  For  example, in the event of a “yes” vote, no one knows for certain what  currency an independent Scotland would adopt or what its  relationship would be with the EU.  Still, we thought you might be  interested in our preliminary thoughts on the tax and legal issues  likely to impact private equity firms and funds, and other AIFs and  their managers, whatever the outcome of the referendum.


If Scotland votes “no” on Thursday and remains part of the United  Kingdom, Scotland will nevertheless receive additional  taxing  powers by 2016.  For example, the Scottish parliament will have the  power to set a new Scottish income tax on top of the UK government  income tax.

If Scotland votes “yes” for independence, independence will begin  no earlier than 2016.  At that time, certain taxes could be increased (or not), thereby impacting the tax burden on Scottish entities or firms doing business there.  

Independence  could also result in  adverse tax implications to existing fund structures  simply as a result of Scotland becoming a separate taxing jurisdiction.  For example, those  fund structures that rely on VAT grouping between the general partner and manager of the  fund may no longer be able to do so, there may be withholding tax implications on cross border payments, and new tax treaties may need to be negotiated between Scotland and  other jurisdictions (including the UK). Much will also depend on whether Scotland is  required to leave the EU, even if only for a temporary period.


If there is a  “no” vote on Thursday and Scotland remains part of the UK, it is proposed  that more powers (in addition to the taxing powers discussed above) will be devolved to  the Scottish parliament.  It is difficult to know at this early stage what powers might  devolve and how they might be used; there is currently little detail on this.  But the general  promise of additional legislative powers is one approach being used to encourage the Scots  to vote “no”.

If the vote on Thursday is “yes”, then as a general matter an independent Scotland would  presumably need to enact its own laws to replace all the UK laws that currently apply in  Scotland, including, for example, the UK Companies Act, the UK Partnership Act and  Limited Partnership Act, and the UK Financial Services  and Markets Act.  Additionally,  Scotland would also have to negotiate with other countries a number of treaties that would  cease to apply to Scotland once it became independent.  An independent Scotland would  also have to set up its own regulatory infrastructure, including regulatory bodies for  energy, financial services, competition, consumer protection, rail, telecoms and pensions,  and all of these could result in changes to the current UK position.

If and when Scotland has separated from the UK, any fund managers/advisers in Scotland  that are currently authorised by the UK FCA and/or PRA would presumably need to be  regulated by a new Scottish equivalent entity (which may impose different capital  adequacy requirements, rules on remuneration and conduct of business rules).   Transitional arrangements may be agreed, but this in not yet clear.  In addition, Scotland  would need to enact its own laws equivalent to the current UK “financial promotion” rules  and its own rules to determine what activities are to be regarded as regulated under  Scottish law.

It seems unlikely that Scotland, as an independent country, would be able to remain a  member of the EU without any further action on its part.  Assuming that is correct (and there is some uncertainty on the point), if Scotland wished to remain in the EU, it would  have to apply for membership of the EU.  That application process would take time and  there is no certainty that such an application would be successful. 

If an independent Scotland was not part of the EU, this would have an impact on the  current application of EU Directives to entities in Scotland.  In particular, from a funds  viewpoint in respect of the AIFMD, private equity funds and other AIFs established in  Scotland or that have general partners in Scotland could no longer be EU-AIFs, and fund  managers established in Scotland would not currently be eligible to be authorised under  the AIFMD.  Further, Scottish managers/advisers would not be able to benefit from the  MiFID “passport” to provide their services across EU member states (and conversely other  EU members would presumably not be able to passport their services into Scotland).   Similarly, the UCITS regime would not apply to Scottish managers or funds.  There might  be transitional arrangements agreed with the EU for any period between Scotland formally  separating from the UK until an EU membership application from Scotland had been  considered, but that is currently unclear