How To Structure A Digital Infrastructure Fund To Maximise Financial Gain

For many investors across the globe, now is the time to invest in digital infrastructure projects. The number of funds raising capital for such projects has accelerated to the extent that between the first and third quarters of 2025, 31% of global real estate investment went to data centres. 

“Given the significant funds required to get these projects off the ground, it’s important to have sound financial and tax advice from the outset to set you up for the long term,” said Jason Dunlop, tax partner and head of real estate at professional services firm S&W.

What makes digital infrastructure projects stand out from other real estate sectors is the scale of activities. As demand for data centres is so high, there’s a move toward hyperscale facilities, which cost on average of $10.7M per megawatt to construct, which is forecast to increase by 6% in 2026.

The world’s largest investors are setting up digital infrastructure funds, Dunlop said.

In 2025, Blue Owl’s digital infrastructure fund raised $7B, while Principal Asset Management raised more than $3.6B for its data centre growth and income fund. Legal & General’s UK and Europe-focused digital infrastructure fund closed in Q4 with €600M in commitments and associated co-investments.

Asset managers in this space tend to have global or regional strategies rather than single-territory strategies, Dunlop said.

“We’ve seen unprecedented investment into the digital infrastructure sector driven by the demands on the data storage requirements and the rise of AI,” he said. “The sector is important across the board, and investors need to be nimble to seize opportunities in the right jurisdiction when suitable assets become available.”

S&W is working with several clients in this space to achieve their investment strategies in a tax-efficient manner, Dunlop said. The team supports clients in three particular areas.  

Structuring Considerations

As with any investment structure, funds should be appraising their options, and tax efficiency should be high on the list of considerations, Dunlop said. Many funds are established in Luxembourg, which provides access to European territories through an expansive and typically favourable double tax treaty network.

Looking at investment structures for the UK specifically, there are several attractive options, he said. Many structures may qualify as a REIT. 

“While data centres often fall within infrastructure funds, for most investment structures, the underlying asset is a piece of real estate that is developed and leased to a tech company, and the underlying activity being carried out is that of a property rental business,” he said. “Therefore, on the face of it, provided that other conditions for REIT status are achieved, a structure could qualify for the regime.”

One of those conditions is the requirement for the REIT company to be listed on a recognised stock exchange, Dunlop said. However, there was a relaxation to this condition in 2022, and provided at least 70% of the investors are qualifying institutional investors, there is no longer a requirement for the REIT company to meet the listing condition. 

“Given the scale of the capital commitments, it is typically institutional investors who are attracted to this asset class, and structures, therefore, stand a reasonable chance of qualifying as a private, nonlisted REIT,” he said. 

The main advantage of REIT status is that all companies in the REIT group are exempt from corporation tax on rental profits or capital gains realised on the disposal of investment properties. The REIT is obligated to distribute 90% of its UK investment profits to stakeholders — referred to as property income distributions.

By default, these PIDs are subject to UK withholding tax at 20%. However, this rate can be reduced, often to zero, depending on the tax profile or territorial location of the underlying investors, Dunlop said. 

“Again, institutional investors often have an advantage here, and REITs may not be required to withhold tax on PIDs paid to institutional investors,” he said. “It is important to take care with implementation, but with upfront planning, it may be possible to create tax-transparent structures.” 

Structuring as a REIT can also bring competitive advantages in corporate real estate transactions, Dunlop said. In these cases, investors need to be conscious of latent capital gains tax on the investment property and may need to factor this into their offer price or seek to apply a discount. 

Where a REIT acquires a property via the purchase of shares in a company, there is a deemed disposal and reacquisition of the underlying real estate, and any gain on the deemed disposal is treated as exempt from corporation tax, he said. 

“Therefore, there is a tax-free step-up in the tax base cost of the underlying real estate, and any tax attributable to the latent gain is washed out,” he said. “In this case, REITs do not usually need to price-adjust for latent gains like other investors.”

S&W works with funds and other investors to appraise structure options upfront to recommend simple, tax-efficient structures that are suitable for the underlying investors, Dunlop said. The team also provides transactional tax services, including due diligence, to assist funds through the deals process and identify and mitigate tax risks. 

Tax Relief

As well as overall structure, S&W provides specialist services to clients investing in digital infrastructure projects. One area that is particularly important for these funds is capital allowances, Dunlop said.

As a form of allowable tax depreciation, the rate of relief for capital allowances depends on the nature of the expenditure and the timing of the claim. At the moment, the UK has a full expensing regime, which is a generous first-year allowance on qualifying capital expenditure given at a rate of 100% or 50%, depending on the nature of the spend. 

Writing down allowances can be claimed on any balances, Dunlop said. The structures and buildings allowance should also be available on any expenditure that would otherwise be nonqualifying.

“The capital expenditure requirements on digital infrastructure projects can be significant, often several billion pounds, and in our experience, a high proportion of the capex on data centres can qualify for relief,” he said. “A claim for capital allowances will either reduce tax liabilities or generate tax losses that can be claimed in future periods, thus providing a beneficial tax shelter.”

Regulation

S&W also advises clients on the regulations that apply in the digital infrastructure world, which might be unfamiliar to those more familiar with real estate, Dunlop said. 

He gave the example of how data centres fall into the scope of the European Union’s second Network and Information Security Directive, known as NIS2. The UK’s version is going through parliament.

Under NIS2, a landlord must enforce stringent physical security risk management and incident reporting on sites. This can no longer be left to the occupier to implement. Fines for noncompliance can reach €10M or 2% of global turnover. 

“There aren't many asset classes within real estate with the same level of regulation as the cybersecurity world,” Dunlop said. “Data centres are critical national infrastructure, so the government wants to put this obligation on the owner of the property as well as the operator.”

S&W is working with clients to structure their risk management appropriately, including amending policies and operating controls and incident preparedness, Dunlop said.

Looking ahead, there is definitely an arms race between countries to build digital infrastructure, he said.

“Our nation’s success in tech sectors is critical to the success of the country as a whole,” he said. “While there are challenges involved in finding suitable sites, strategic alliances between territories could emerge between those who have created successful investments and those who don’t yet have capacity.”

This article was produced in collaboration between S&W and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.