Fill the glass to the
brim II: have we
broken through?
An update on the tax implications of UCITS IV.
March 2012
kpmg.com
Executive summary
4
Transposition of the Directive
6
Key tax issues
8
Cross-border merger of two or more EU-resident funds
14
Management company passport
18
Master-feeder structures
21
Indirect tax
24
Georges Bock
Chairman
european Investment Management & Funds Tax Practice
Foreword
In 2010, KPMG International produced the report Fill the glass to the brim where we took a close look at the implications of the new UCITS IV Directive. At the time, KPMG identified the critical tax issues and examples of discrimination and barriers to successful implementation.
In this new report, Fill the glass to the brim II: have we broken through? we are following up to see whether UCITS IV has actually been implemented in the eU member states, and if any progress has been made on the tax hurdles identified in 2010.
In a nutshell, since 2010, as far as taxation is concerned, only modest progress has been achieved. Some countries have solved tax issues with the Single Management Passport component of the Directive to make sure they can offer workable solutions for their locations.
But on the critical issue of tax neutrality for investors on fund reorganizations, progress has stalled. Market participants are clearly saying that they are therefore not going to consider taking advantage of the cross-border merger possibilities as the tax considerations are much too disruptive. To that end, we invite policy makers to take up the challenge of making sure UCITS IV can deliver the efficiencies that it promised to investors.
optimists might see UCITS IV as a glass half full and pessimists as a glass half empty. Through this report our goal is to help fill the glass to the brim and break through the challenges that exist in order to eliminate uncertainties from this market.
Executive summary
Fill the glass to the brim II: have we
broken through?
The need for certainty
UCITS funds are intended to be marketed to retail investors—that is, the general public. At the best of times, removing uncertainties from this market is important to give people the confidence they need to invest.
In today’s difficult economic environment, eliminating uncertainty is even more important. retail investors demand and deserve legal certainty, and it is up to legislators to lay a sound foundation for making good investment decisions.
0 2 4 6 8 10
2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 2010 2011 Cross-border Merger Scenario (out bound): Fund level Cross-border Merger Scenario (out bound): Investor level Management Company Scenario: Fund Level Management Company Scenario: Investor level Management Company Scenario: ManCo level
Master – Feeder Scenario: Ongoing
taxation between Master and Feeder:
Fund level/WHT on dividends
Master – Feeder Scenario: Ongoing
taxation between Master and Feeder:
Fund level/ Redemption of units
Master – Feeder Scenario: Transformation of Fund into Feeder:
Fund level
Master – Feeder Scenario: Transformation of Fund into Feeder: Investor level 6
3
7
1 3
1 1 1
3 8 1 6 3 4 4 1 5 1 7 1 8 1 6 6 4 4 4 2 7 2 8 1 5 4 5 4 7 2 7 2
There is much in the UCITS IV directive that will help achieve this goal. KPMG previously identified some important tax issues that should be addressed if UCITS IV is to serve as the platform for a truly pan-european product. In numerous examples, our research found varying degrees of discriminatory tax treatment of cross-border fund operations. even though, to date, progress has been made, many of these cases of discrimination and adverse tax consequences remain.
Changes in possible tax consequence: 2010 versus 2011
A green light signals business as usual. Industry participants need not take any action as a consequence of UCITS IV, as per the chosen scenarios. The issues raised do not specifically relate to the directive and would normally be considered in the course of making a business decision.
An amber light signals that industry participants should monitor the situation closely due to the possible adverse tax consequences in any one of the scenarios. A red light highlights an area in which amendments to local legislation may be necessary before the industry players can be sure that tax neutrality can be achieved. A red light also indicates that material issues should be addressed to protect investors from an unfair tax liability or discriminatory tax treatment.
Current status – where do we stand
since our previous publication?
Certain national tax rules have been amended to make UCITS IV more workable. In efforts to remain attractive as locations for managing investment funds, countries like Italy, Ireland, luxembourg and Sweden have introduced new tax rules that should allow funds to carry out cross-border operations without adverse tax consequences.
In our first edition of Fill the glass to the brim, we used a traffic light system to illustrate our findings. The chart opposite shows how these lights have evolved. From the chart, we see that overall the number of red lights (which signals situations in which unexpected tax consequences for investors may arise) have decreased. new amber lights have emerged which signals that the situation should be closely monitored due to the possible adverse tax consequences of any one of the scenarios. Then we see an increase, though moderate, in the number of green lights (indicating that taxation should not be an issue).
In particular, the taxation of investors upon a cross-border merger remains a critical issue as none of the analyzed countries provide for pure tax neutrality. With regard to master-feeder structures, almost no progress has been made, with the exception of slight movements in ongoing taxation. We do see, however, slight improvements with respect to the single management company scenario as some countries have clarified the tax consequences at fund and investor level.
We continue to believe that most tax issues arising from the UCITS IV framework should be solved on an eU level. However, we note recommendations we have made have not been taken into consideration and that the eU Commission has taken little public initiative. Given the current economic difficulties, solving the tax implications of UCITS IV does not appear to be high on the political agenda. However removing tax hurdles appears absolutely necessary to deliver the promised UCITS IV efficiencies to investors.
Our recommendations
Key enabling tax changes we recommend include:• Fund mergers: A separate eU Directive, based on the
ideas in the eU Merger Directive, should be issued to cover taxation issues for cross-border fund operations at the levels of both the fund and the investor.
• Management company passport: new eU-wide
rules should be designed for the taxation of funds and their management companies. Alternatively, to avoid introducing new complexities and preserve the status quo, national tax rules should exempt UCITS undertakings from the “effective Seat of Management” doctrine. In doing so, the funds could
remain taxable in their country of establishment, even if the fund is managed by a non-resident eU-based management company.
• Value Added Tax (VAT): Member States should take
a more uniform approach on the question of when they consider a fund to be a “taxable person” for VAT purposes. To avoid distortions within the eU, we recommend Member States adopt a more uniform interpretation of what activities constitute
VAT-exempt fund management.
We continue to believe
that most tax issues
arising from the UCITS IV
framework should be solved
at the eU level.
‘‘
UCITS IV
Transposition of
the
Directive
To create a harmonized marketing in the eU, Member
states should have transposed the UCITS IV Directive into
national law by 1 July 2011 by amending their laws to bring
them in line with the various UCITS IV provisions.
In keeping with its long-standing tradition of transposing UCITS-related directives rather quickly, on 17 December 2010, luxembourg was the first eU Member State to enact the UCITS IV Directive and its implementation measures into national law. other countries followed, including the netherlands, Denmark, German, Sweden and the United Kingdom.
Yet, even though the deadline has passed, some Member States have not fulfilled their obligations. These include Belgium, Cyprus, Greece and Portugal. As foreseen by the Directive, late transposition may entail practical issues where cross-border operations involve a Member State that has not transposed the UCITS IV Directive. This is why the european Securities and Markets Authority (eSMA) introduced practical
As foreseen by the Directive, late
transposition may entail practical issues
where cross-border operations involve a
Member State that has not transposed the
UCITS IV Directive.
’’
‘‘
arrangements to resolve these issues. In essence, the eSMA takes the following views:
• Management companies established in a transposing member state should be able to create a fund via the management company passport in a Member State where the UCITS IV Directive has not been transposed.
• Cross-border mergers involving a UCITS established in a Member State that has not transposed the Directive are not possible.
• Master-feeder structures should not be permitted if one of the two Member States in which the UCITS are established has not transposed the Directive.
The following table presents an overview the status of eU Member States in transposing the UCITS IV Directive.
Country
Directive 2009/65/EC
Implementing Directives
2010/43/EU and 2010/44/EU
Austria
YES
YES
Belgium
NO
NO
Bulgaria
YES
NO
Cyprus
NO
NO
Czech Republic
YES
YES
Denmark
YES
YES
Estonia
YES
YES
Finland
YES
YES
France
YES
NO
Germany
YES
YES
Greece
NO
NO
Hungary
YES
YES
Ireland
YES
YES
Italy
NO
NO
Latvia
NO
NO
Lithuania
NO
NO
Luxembourg
YES
YES
Malta
YES
YES
The Netherlands
YES
YES
Poland
NO
NO
Portugal
NO
NO
Romania
NO
NO
Slovakia
YES
YES
Slovenia
YES
NO
Spain
YES
NO
Sweden
YES
YES
United Kingdom
YES
YES
UCITS IV
Key tax
issues
In our first edition of
Fill the glass to the brim
, we
focused on the main tax constraints associated with
the Directive’s three crucial areas of harmonization
related to cross-border fund structuring.
In this section, we update our findings on these three areas, which are:
1. cross-border merger of two or more eU-domiciled funds 2. Management company passport and cross-border
management of fund structures
3. establishment of cross-border master-feeder structures. We use a traffic light system to illustrate our findings.
• A
green light
signals business as usual.
Industry participants do not need to take any
action as a consequence of UCITS IV, as per
the chosen scenarios. The issues raised do not
specifically relate to the Directive and would
normally be considered during the course of
making a business decision.
• An
amber light
signals that industry
participants should monitor the situation
closely due to the possible adverse tax
consequences in any one of the scenarios.
• A
red light
highlights an area in which
amendments to local legislation may be
necessary before the industry players can
be sure that tax neutrality is achievable. A
red light also indicates that material issues
should be addressed to protect investors
from an unfair tax liability or discriminatory tax
treatment.
The traffic light system focuses on the main countries where eU funds are domiciled and managed. In the case of relocating the management company out of the local jurisdiction, we focus on eleven main locations of domicile within the eU. The system is useful to view the various issues that arise across the different jurisdictions. A brief country synopsis is included to help explain each scenario.
Changes
As mentioned, certain Member States introduced new income tax measures with the aim to increase the attractiveness of their jurisdictions with regard to cross-border fund administration, distribution and management. In addition, the scope of the country reports has been extended by adding Malta and the netherlands.
Word of caution
This study does not aim to indicate which jurisdiction is the most favorable UCITS IV location. This determination will vary with each case. A red light should not be interpreted as a “no go” for a country. The aim is simply to outline certain considerations for the industry before UCITS IV can fully meet its objectives. A further aim is to encourage thoughts on the development and creation of an optimal eU tax framework to allow the european fund industry to compete globally.
A red light should not be
interpreted as a “no go” for a
country. The aim is simply to
outline certain considerations for
the industry before UCITS IV can
fully meet its objectives.
‘‘
Status changed compared to 2010 study
1. Cross-border merger scenario (outbound)
Fund level*
* To the extent that a fund holds UK equities, UK stamp duty may apply on a merger unless clearance requirements are satisfied. ** Tax resident in the respective country.
Investor level**
Finland Germany
Malta Spain Luxembourg France Italy Ireland
UK
The Netherlands
Sweden
Finland Germany
Malta Spain Luxembourg France Italy Ireland
UK
The Netherlands
Sweden
Status changed compared to 2010 study
Management company level1
Investor level*
2. Management company scenario
Malta
Spain Germany Luxembourg
France Ireland UK
The Netherlands
Fund level
Finland Germany Ireland UK
The Netherlands
Sweden
Malta
Spain France Italy Luxembourg
* Tax resident in the respective country
Finland Germany
Malta Spain
Luxembourg France Italy Ireland
UK
The Netherlands
3.1. Master–feeder scenario: transformation of fund into feeder2
Fund level
** Under new proposed tax legislation, Stamp Duty reserve Tax should not apply to a UK feeder fund that invests in a foreign master where the underlying investments are foreign equities/brands.
Investor level*
* Tax resident in the respective country
Finland Germany
Malta Spain Luxembourg France Italy Ireland
UK**
The Netherlands
Sweden
Finland Germany
Malta Spain Luxembourg France Italy Ireland
UK
The Netherlands
Status changed compared to 2010 study
3.2 Master–feeder scenario: ongoing taxation between master and feeder3
Fund level: WHT on dividends
1. outbound without keeping a branch.
2. Transformation of a local fund into a local feeder of a foreign master. 3. Transformation of a local fund into a master having a foreign feeder.
4. Withholding tax on distributions to certain foreign investment funds is abolished as from 1 January 2012, see further under the country report pages as to which funds.
5. Uncertainty on application of exemption exists where non-treaty FCP holds participations in Spanish master fund of 25 percent or more.
Fund level: redemption of units
Finland Germany
Malta Spain5
Luxembourg France Italy Ireland
UK
The Netherlands
Sweden Finland Germany
Malta Spain Luxembourg France Italy Ireland
UK
The Netherlands
Sweden4
Cross-border
merger
of two
or more
EU-resident
funds
UCITS
Management company
Depositary Regulator Auditor
Country A
UCITS
Management company
Depositary Regulator Auditor
Country B
UCITS
Management company
Depositary Regulator Auditor
Country C
Source: KPMG International, March 2012
In 2010, KPMG’s analysis recommended introducing a separate eU directive to ensure and promote the further development of the eU fund market. This Directive should be an extension of the current eU Merger Directive for commercial companies and should cover taxation issues for domestic, foreign and cross-border fund reorganizations (Table 1).
Different tax treatment
Under UCITS IV, all eU countries are obliged to allow cross-border mergers from a legal and regulatory point of view. The tax treatment of fund mergers varies from country to country. While some countries allow tax neutrality for domestic mergers, most impose tax on foreign and cross-border fund reorganizations, at the level of the fund (Table 2) and/or at the level of the investor (Table 3).
1: Possible merger situations
Before UCITS IV
After UCITS IV
(2) Foreign merger
(1) Domestic merger (3) Cross-border merger
(inbound) (4) Cross-border merger (outbound)
Investors in
Country A Investors in Country A Investors in Country A Investors in Country A
Fund in
Country A Country BFund in Country AFund in Country AFund in Fund in
Country A Country BFund in Country BFund in Country BFund in
Country Domestic merger
Cross-border merger (inbound)
Cross-border merger (outbound)
Discriminatory? Tax neutral?
Finland no YeS YeS YeS
France no no no no
Germany no no no no
Ireland no no no no
Italy no no no no
luxembourg no no no no
Malta no no no no
The netherlands no no no no
Spain no no no no
Sweden no no no no
UK no no no no
= Generates no taxation = Generates taxation
Table 2: Does taxation arise at fund level in the following cases?
= Status changed compared to 2010 study Source: KPMG International, March 2012
Country
Domestic
merger
Foreign
merger
Cross-border
merger
(inbound)
Cross-border
merger
(outbound)
Discriminatory Tax
neutrality
Austria
NO
NO
NO
NO
NO
Belgium
YES
YES
YES
YES
NO
Cyprus
NO
NO
NO
NO
NO
Czech Republic
NO
YES
YES
YES
YES
Denmark
YES/NO
YES/NO
YES/NO
YES/NO
NO
Estonia
NO
NO
NO
NO
NO
Finland
NO
YES
YES
YES
YES
France
NO
NO
NO
NO
NO
Germany
NO
NO
YES
YES
YES
Greece
NO
NO
YES
YES
YES
Hungary
YES
YES
YES
YES
NO
Ireland
NO
NO
YES
YES
YES
Italy
NO
YES
YES
YES
YES
Luxembourg
YES
YES
YES
YES
NO
Malta
NO
NO
NO
NO
NO
The Netherlands
NO
NO
NO
NO
NO
Poland
YES
YES
YES
YES
NO
Portugal
YES
YES
YES
YES
NO
Romania
YES
YES
YES
YES
NO
Slovakia
NO
NO
NO
NO
NO
Spain
NO
YES
YES
YES
YES
Sweden
NO
NO
NO
NO
NO
United Kingdom
NO
NO
NO
NO
NO
Table 3: Does taxation arise at investor level in the following cases?
= Generates no taxation = Generates taxation = Status changed compared to 2010 study Source: KPMG International, March 2012
on fund reorganization, tax discrimination could still arise in some cases based on the fund’s residency. In Spain, for example, a domestic fund merger does not trigger tax on a reorganization; however, a foreign or cross-border merger of funds creates a taxable event in the hands of a Spanish resident investor.
As pointed out in our first edition of Fill the glass to the brim, the situation becomes more complex when one considers the different legal forms of UCITS in different eU countries. The present directive distinguishes between three types of funds: 1. contractual funds
2. corporate funds 3. unit trusts.
not all of these legal structures are available in all Member States (Appendix 1). In some countries, no taxable event arises when fund reorganizations are limited to domestic and foreign funds that have the same legal form.
one of the main issues in a cross-border merger is the complexity arising from non-comparable legal fund structures. In addition, currently, most tax laws differentiate between domestic and foreign mergers and are silent when it comes to cross-border reorganizations.
What actions are needed for
UCITS IV to work?
This situation clearly leaves promoters dealing with significant uncertainty and poses a serious obstacle to the realization of an efficient single market for funds within the eU, which is the bedrock of the UCITS IV directive’s objectives. In moving toward a single european fund market, it will be important to provide further support in the form of a set of common rules on the taxation of
cross-border fund operations. In the meantime, certain Member States have endeavored to reduce excess tax burden by changing their tax legislations or making commitments with regard to future administrative practice. Consider the following examples:
• According to the French tax authorities, in a cross-border merger situation, the benefit of the deferred taxation regime should be granted to mergers carried out between entities in accordance with UCITS IV for the operations realized in conformity with the regulations of the Member States.
• At the fund level, a cross-border merger should not entail tax consequences in ltaly because funds are now tax-exempt. In this regard, Italy joined countries like Malta, Germany, Ireland, the netherlands and luxembourg in which funds are virtually tax exempt.
• Under new tax rules in Sweden, cross-border mergers between UCITS funds domiciled within the european economic Area (eeA) will not trigger any Swedish exit taxation for the transferring funds.
one of the main issues in a
cross-border merger is the
complexity arising from
non-comparable legal fund
structures.
‘‘
Management
Company
Passport
UCITS
Depositary Regulator Auditor
Country A
UCITS
Management Company
Depositary Regulator Auditor
Country B
UCITS
Auditor Regulator Depositary
Country C
Source: KPMG International, March 2012
Under UCITS IV, it is legally possible for a fund established in one eU
jurisdiction to be managed by a management company located in a
different eU jurisdiction. This can be achieved in several ways. For
example, multiple management companies can be merged into one
single management company, or the management company can be
relocated from the fund’s jurisdiction to another domicile.
For example, the UK’s Finance Act 2011
will treat corporate UCITS funds that are
tax-resident in the State in which they are
authorized as not being UK-resident for tax
purposes.
Single management company
To achieve a single management company, no particular taxation issues should arise because management companies are generally set up as eU-resident corporations. The eU Merger Directive rules, as transposed into national law, should operate to render most of these operations largely tax-neutral.
Cross-border management
More complex taxation issues arise at the fund level for cross-border management companies. These issues hinge on whether the relocation of the fund’s management company from one eU jurisdiction to another entails a change in tax jurisdiction at the fund level. Many eU countries define tax residency as the location where the business is effectively managed. The question arises as to whether the fund’s residence is defined by its country of establishment or the place of establishment of its management company. In this regard, our study indicated that contractual funds managed by a foreign management company may become liable to tax in the country where the management company is established. For example, the United Kingdom’s Finance Act 2011 will treat corporate UCITS funds that are
tax-resident in the State in which they are authorized as not being UK-resident for tax purposes. The measure will also apply to unit trusts and certain contractual funds but only for capital gains taxation purposes.
New tax rules
Certain member states have introduced rules and guidelines to eliminate the taxation risk associated with a single Management company passport, with the following results (among others).
• In Germany, a foreign contractual fund (“Sondervermögen”, e.g. FCP*) managed by a German management company will be taxed like a German fund (i.e. tax-exempt), if the fund’s country of origin accepts this right of taxation (and tax exemption) and does not refer back to Germany due to the German management company.
• In Ireland, the Finance Act 2010 provides further comfort that no negative Irish tax impact should arise for a non-Irish UCITS with an Irish management company.
• Starting from 1 July 2011, investment funds are not considered liable to tax in Italy.
• In luxembourg, the “non-attraction principle” was confirmed and so no tax should be due in luxembourg for foreign funds remotely administered by a management company situated in luxembourg.
• new tax rules that came into force on 1 January 2012 entail that Swedish investment funds and comparable foreign investment funds with limited tax liability in Sweden will be exempt from Swedish income tax as of 1 January 2012.
• The netherlands have excluded UCITS undertakings from the “effective Seat of Management” doctrine.
Remaining tax challenges
Despite the efforts made by certain Member States, a broad range of taxation issues remain. Consider the following examples:
• no taxation rules currently exist for the relocation of a contractual fund or a unit trust from one eU jurisdiction to another and so some jurisdictions could consider the transfer to be a liquidation of the fund in their country. This may trigger taxation of unrealized capital gains.
• The jurisdictional separation of the management company and the fund could lead to double taxation or double tax exemptions at fund level. For example, a Spanish contractual fund that has a management company in luxembourg probably would not be subject to taxation in Spain. At the same time, the fund will not be subject to any taxation in luxembourg. But if a luxembourg fund is managed by a Spanish management company, both a subscription tax in luxembourg and a 1 percent Spanish tax on the fund income would be due.
• The relocation of the management company to a jurisdiction other than that of the fund could also entail taxation of the fund income in the management company’s jurisdiction at current full rates. exemptions, partial exemptions or special low tax regimes are often restricted to domestic funds only.
‘‘
’’
• The separation of the management company and the fund could lead to withholding taxes on distributions from the fund to its investor in its country of establishment and/ or in the jurisdiction of the management company. An Irish or French contractual fund managed by a Spanish management company could be required to pay Spanish withholding tax on its distributions.
Finally, the jurisdictional separation of the management company and the fund could alter the ability of the fund to access double taxation treaties. on the other hand, Spain may give access to its treaty network to foreign funds managed by a Spanish management company.
A pragmatic approach might involve setting up a single management company that operates a branch in each fund location with enough substance to supervise the effective seat of management in the fund’s country of establishment. Actually, the transfer of a management company out of France, Germany, luxembourg, Spain and United Kingdom could trigger taxation unless assets and liabilities remain assigned to a permanent establishment on these jurisdictions.
However, due to recent eU Case law*, it should be possible to
avoid taxation.
The way forward
We previously stated that it is of paramount importance to define new rules within the eU to determine the tax residence of funds and their management companies on a cross-border basis. So far, no progress has been made in this regard. Thus, the alternative approach of introducing national tax rules to exempt UCITS from the “effective Seat of Management” doctrine has crystallized as solution in some countries. The ultimate objective is to ensure that funds remain taxable in the country of supervision, even if they are being managed by a non-resident eU-based management company.
The jurisdictional separation
of the management company
and the fund could lead to
double taxation or double tax
exemptions at fund level.
A pragmatic approach
might involve setting up a single
management company that
operates a branch in each fund
location with enough substance
to supervise the effective seat
of management in the fund’s
country of establishment.
‘‘
’’
’’
‘‘
Master-feeder
structures
Feeder
UCITS
Feeder
UCITS
Depositary Auditor Regulator Depositary Auditor Regulator Depositary Auditor Regulator
Country A
Management Company Management Company Management Company
Country B
Country C
Source: KPMG International, March 2012
Master
UCITS
one objective of UCITS IV is to create an environment that allows for the pooling
of assets into a master fund. The aim is to lower costs by developing economies
of scale. The proposal allows for several feeder funds to invest in a single master
fund, provided each of these feeders invest more than 85 percent of their assets
in the master.
Setting up a master-feeder structure with a local management company generally does not produce negative tax consequences. However, the same cannot be said on a cross-border basis. Since our first Fill the glass to the brim only limited progress has been made.
Critical location issues
UCITS IV provides for an extensive range of possibilities. It appears, however, that the pooling of assets in a master fund in order to streamline operations and gain economies of scale may be critical to the ultimate decision on the single management company’s location. Ideally, introducing the master-feeder concept into the UCITS world implies transforming existing domestic UCITS into local feeder funds and transferring these assets into a newly created or existing master fund, located in the country of choice.
restructuring of this kind inevitably raises tax considerations at the fund, investor and management company levels. The primary considerations are discussed below.
Another way of repatriating
cash from the master to the
feeder is by redeeming units
of the master.
‘‘
’’
Country Tax neutrality
Finland France Germany Ireland Italy luxembourg Malta The netherlands Spain
Sweden2 2
UK
Taxation at fund level: are
investment funds really paying
no tax?
Investment funds are generally not taxed. This is also true for domestic master-feeder relationships. When the master distributes to the feeder, no withholding tax is due.
In a cross-border relationship, the situation might be different. Some local tax provisions have yet to integrate the concept of cross-border master-feeders. Countries like Ireland or
luxembourg will not withhold taxes on such a distribution, while Germany or Spain might. The feeder funds could reclaim the withheld tax on the basis of the recent european Court of Justice (eCJ) decision in Aberdeen (C-303/07), but the administrative burden and cash deferral disadvantage would still remain. Another way of repatriating cash from the master to the feeder is by redeeming units of the master. luxembourg used to have specific capital gains tax provisions on the sale of substantial holdings in domestic companies by non-resident taxpayers. Further to a change in luxembourg tax law, no tax should be due in luxembourg for gains derived by non-residents (e.g. foreign feeder funds) from the disposal of interests in domestic corporate funds (e.g. an incorporated master fund, or “SICAV*”).
Table 4: For a master-feeder structure, does withholding tax apply upon profit distribution?
Table 5: Is the levy of a withholding tax discriminatory?
Country Distribution from a company to a master fund
Distribution from a master fund to a feeder fund
Finland
YeS
YeS
France
YeS
YeS
Germany
YeS
no
Ireland
no
no
Italy
YeS
no
luxembourg
no
no
Malta
no
no
The netherlands
no
no
Spain1
YeS
1YeS
1Sweden2
no
2no
2UK
no
no
= no withholding tax = Withholding tax
Source: KPMG International,March 2012
* SICAV: Société d’Investissement à Capital Variable
1 In a cross-border situation, the withholding tax is not refundable.
2 Withholding tax on distributions to certain foreign investment funds is abolished as of 1 January 2012, see further under the country report pages as to which funds
Discriminations:
• Two comparable situations are treated differently.
• Profit distribution to domestic and foreign funds should be treated the same.
• If a withholding tax is levied in a cross-border situation, whereas a pure domestic distribution is withholding tax-exempt, such situation would be considered as discriminatory.
In today’s world, the
transformation of existing
UCITS into feeder funds will be
done at market value, and so
gains not yet crystallized at the
investor level could become
taxable in some countries such
as Germany.
‘‘
’’
Tax consequences at investor level
In today’s world, the transformation of existing UCITS into feeder funds will be done at market value, and so gains not yet crystallized at the investor level could become taxable in some countries such as Germany.
rollover provisions sometimes apply to funds restructurings under national law, but these rules do not always apply when the assets are transferred to a master fund domiciled in another Member State.
Single management company:
How to get the fee policy right?
While a newly established master-feeder structure would be managed under the single management company passport concept, the situation could be different when converting an existing fund into a feeder.
In the latter case, it seems unlikely to expect a single management company to manage the master fund in conjunction with the feeder funds. rather, we expect that the functions and duties of managing these funds would be divided among the management company responsible for the master fund and the various managing companies responsible for the feeder funds.
UCITS IV foresees that the relationship between the feeder and master management company will need to be based on contractual arrangements. This process should give the fund industry the opportunity to clarify current practice and submit to an intensified transfer pricing review.
Domestic
Country A
Foreign
Country BMaster
Feeder Feeder
NO WHT WHT
Indirect
tax
Other matters outside UCITS IV
A key risk arising from UCITS IV is that a merger of funds may cause the transfer of assets to attract VAT in some instances. However, we expect that this risk could be mitigated through careful planning of the merger as a VAT-free transfer of a business as a going concern. Alternatively, we expect that a VAT exemption may apply in the majority of cases where the transfer is within the scope of VAT.
Differences between Member States in how they implement the european VAT Directive creates VAT distortions within the fund management sector. These distortions include:
• Differences in the application of VAT exemption to
fund management. There is clearly scope to address this
distortion within the current negotiations on the rewrite of the european VAT Directive governing financial services.
Differences between
Member States in how they
implement the european VAT
Directive creates VAT distortions
within the fund management
sector.
‘‘
• Differences in whether Member States consider a fund
to be a “taxable person”. Providing fund management
services across borders may affect whether the services are liable for tax in the manager’s or fund’s Member State. Members States could mitigate this distortion by taking a more uniform approach to when they consider a fund to be a taxable person.
• Differences between Member States in their interpretation of what activities constitute fund
management. These VAT distortions will become more
visible in light of the increases in volume of cross-border management services that will arise from UCITS IV.
Country
reports
The following Country reports summarize the tax implications of UCITS
IV by country. Under UCITS IV, numerous new business combinations
are now theoretically possible.
For most countries discussed in this report, we have analyzed the tax
results under three scenarios – the single management company,
the cross-border merger and the master-feeder structure – at the
levels of the fund investor, the fund and the management company.
For Finland, Italy and Sweden, however, the scope of our analysis
is narrowed to focus on the tax consequences on the fund and
investors level.
Finland
France
Malta
Germany
Ireland
Italy
United Kingdom
The Netherlands
Luxembourg
Finland
Antti Leppanen
KPMG in Finland
The absence of tax framework presents challenges in using UCITS IV as a
platform for pan-European fund products. In Finland, funds are tax-exempt,
but a number of tax issues and uncertainties still remain, especially at the
investor level. Even if the preferred fund structure and business model
are selected primarily based on business considerations, tax issues will
undoubtedly have an important impact. Finnish domestic tax legislation
should be amended to ensure that UCITS IV can be fully used to produce
economies of scale, cost savings and improved efficiency in fund industry.
I) Single management company
Investor level
The merger of management companies (inbound and outbound) and the conversion of a management company into a branch does not trigger any taxation at investor’s level as long as the potential change in tax residency of the UCITS does not imply the disposal of the units.
Fund level
The transfer of a management company does not trigger any taxation at fund level. The same is true on the full or partial transfer of the management company’s activities.
II) Cross-border merger
Fund level
Domestic merger: At the fund level, a domestic merger should not trigger taxation as the funds are not subject to income tax in Finland.
Cross-border merger: legally, Finnish funds cannot currently merge across borders. As the merger would not be regarded as a merger from legal point of view, Finnish transfer tax would be due on the transfer of Finnish shares. However, after the implementation of the directive (on 31 December 2011) also a cross-border merger should be regarded as a merger for transfer tax purposes and thus no Finnish transfer tax is due. A merger should not trigger corporate income taxation as the funds are not subject to income tax in Finland.
Investor level
Domestic merger: The merger of the funds does not trigger taxation at the investor level if it is carried out in accordance with Finnish Business Income Tax Act. These special provisions apply to a merger in which one or more Finnish companies are dissolved without liquidation and all of the assets and liabilities of the dissolved company are transferred to another Finnish company. The dissolved company’s shareholders,
who may be residents or non-residents, must receive shares in the receiving company as compensation in proportion to their shareholding. A small part of the compensation, limited to 10 percent of the nominal value of the shares received as compensation, may consist of a cash payment. The cash payment is taxable for the Finnish resident unit holders. Cross-border merger: Cross-border fund mergers have not yet been tested in Finnish tax law, and so Finnish funds cannot currently merge across borders. However, after the implementation of the directive on 31 December 2011 a cross-border merger of funds is legally possible. Currently, Finland has no tax legislation to guarantee that a cross-border merger could be carried out tax neutrally for the Finnish investor. According to the Finnish Courts, a merger of two SICAVs can be carried out tax neutrally from a Finnish investor’s point of view. Thus, corporate and unit trust mergers could be expected to be tax neutral at the investor level if carried out in a way that corresponds with the merger described in Finnish Business Income Tax Act, but this result is uncertain. even more uncertain is whether a merger of contractual funds can be tax-neutral from a Finnish investor’s point of view.
III) Master-feeder
Fund level
Where the master fund is located in Finland and the feeder fund is located abroad, withholding tax applies when distributions are made from the domestic (Finnish) master fund to the foreign feeder fund. If the foreign feeder is eligible for tax treaty benefits, the tax treaty may prevent this treatment. Also, no withholding tax applies when the domestic master fund redeems its units. However, withholding tax might be levied when the master fund makes distributions of profit.
Investor level
In both domestic and cross-border situations, the conversion of a fund into a master or feeder fund should not trigger taxation at the investor level if the investor keeps the original units.
F
Yves Rober
rance
t
Fidal* in France
While not addressed by UCITS IV,
tax issues will play a crucial role both
at the time of any restructuring and
going forward. No matter where the
management company, newly merged
fund or post-conversion feeder fund
is located, accounting principles and
declaration obligations must be met to
permit investors, resident in another state,
to benefit from their relevant tax regime.
The full tax exemption of French funds may
ensure more tax neutrality in the framework
of a European collective investment market.
I) Single management company
Management company level
Under UCITS IV, it will be possible to transfer an existing management company to or from France. However, the transfer of an existing management company outside France could give rise to taxation unless the assets and liabilities remain assigned to a French permanent establishment (under certain conditions). The transfer of an existing management company into France would not trigger any taxation in France. However, any income and gains on business activities carried out in France will be subject to French corporate income tax at the standard rate (34.43 percent) from the time of the transfer. As a result, the transfer of activities could lead to taxation in the case of a partial or full transfer of functions outside France. However, should all the assets and liabilities (and consequently the functions) remain assigned to a French branch, the event is tax-neutral. The transfer of a management company to France should not constitute a taxable event in France. Any result of the French management company will be taxable in France from the time of the transfer.
* Fidal is an independent legal entity that is separate from KPMG International and KPMG member firms.
Fund level
Outbound: The transfer of a French management company abroad should not raise any tax residence questions in France since funds are not considered as having a tax residency from a French tax standpoint. Inbound: The change of the domicile of a non-French contractual fund to France would be tax-neutral (from a French viewpoint) as long as funds domiciled in France continue not to be liable to tax in France.
Investor level – Change in location
of the fund
There is no requirement to disclose unrealized gains at the investor level as long as the potential change in the tax location of the UCITS fund’s management company would not imply a disposal of the shares/units.
Investor level – ongoing taxation
UPDATe: Dividend distributions from a French domiciled fund to a foreign investor will be exempt from withholding tax (except for the part of dividends corresponding to French source dividends subject to withholding tax at a rate of 25 percent or a reduced treaty rate if applicable).
The levy of French withholding tax on dividend distributions to foreign investors could be considered discriminatory since French investors would not suffer French withholding tax.
II) Merger
Fund level
From a French regulatory point of view, French funds (FCPs or SICAVs) can presently merge with other French funds (FCPs or SICAVs). In principle, no French tax issues should arise from such a merger insofar as funds are not liable for taxation in France.
Investor level
For the investor, the neutrality would depend on whether or not the merger is carried out under a transaction covered by the French tax neutrality regime, with the following exception.
Domestic merger: In principle, mergers of funds are tax-neutral for the investor, provided certain conditions are met (e.g. regarding the level of the cash payment).
UPDATe: Cross-border merger: According to the French tax authorities, the benefit of the deferred taxation regime should be granted to mergers carried out between entities in accordance with UCITS IV for the operations realized in conformity with the regulations of the member states.
III) Master-feeder
Fund level
Master-feeder funds are also not liable for taxation in France.
Investor level
The conversion of a French fund into a feeder fund may benefit from the deferred taxation regime provided the feeder fund is wholly invested in units or shares of the master fund and ancillary cash.
At the time of writing, the French tax authorities have not yet commented on the tax consequences of the conversion of a fund into a master fund, and so some uncertainty remains in this regard.
ongoing taxation – Withholding tax
UPDATe: Dividend distributions from a French master fund to a feeder fund located in another Member State will be exempt from withholding tax (except for the part of dividends corresponding to French source dividend, where the fund splits its income into different coupons subject to 25 percent withholding tax, only on French source dividend coupons).
Germany
Andreas Patzner
KPMG in Germany
The translation of the UCITS IV directive
into German national law has met some
expectations. For example, the right of
taxation of a fund is now connected to the
country applying its investment supervision’s
law, ending the discrimination of funds with
management companies from a different
country. On the other hand, discrimination
against cross-border mergers and
master-feeder transformations remains. Together
with the implementation of UCITS IV,
changes were made to the German
withholding tax system. So far, the UCITS IV
implementation act has been used as a Trojan
Horse to close fundamental loopholes in
matters of fraudulent cum-/ex-trades.
I) Single management company
Management company level
Under UCITS IV, it will be possible to transfer an existing management company to or from Germany. However, the transfer of an existing management company out of Germany could give rise to taxation unless the assets and liabilities remain assigned to a German permanent establishment.
Fund level
UPDATe: Inbound: A foreign contractual fund, (“Sondervermögen”, e.g. FCP) managed by a German management company, will be taxed similar to a German fund (i.e., tax-exempt), if the country, from which the fund origins, accepts this right of taxation (and tax exemption) and does not refer back to Germany due to the German management company. For corporate funds, new regulations are still due.
Investor level
There are no immediate tax consequences for the investor in case of a cross-border management company. However, any additional tax burden
crystallized at the fund level would be passed on to the investor (as cost).
II) Merger
Fund level
There is no impact at the fund level as funds are tax-exempt in Germany.
Investor level
UPDATe: German law allows for tax-free mergers only between funds that are subject to the same investment supervisions law. Consequently, all cross-border mergers are currently considered as taxable exchanges of fund units.
III) Master-feeder
Fund level
UPDATe: Payments of a German (master) fund to a foreign (feeder) fund are subject to withholding tax to the extent they consist of German dividends.
Fund level
The redemption of fund units held by another fund does not affect the taxation at the fund level as funds are tax-exempt in Germany.
Investor level
The transformation of a fund into a master would imply that the investor redeems all the units held in the original fund and receives new units in a feeder; this would be regarded as a taxable exchange of fund units.
Investor level
The transformation of a fund into a feeder would imply transferring the fund’s assets to the master and so capital gains would be realized at the level of the transferring fund. Some of these capital gains would then pass to the investor on distribution/deemed distribution, and taxation would result.
Investor level
Currently, the acquisition of units of foreign feeder funds that comply with the German provisions on indirect risk diversification is tax-neutral for German investors, as they would be treated as regular investors in foreign funds.
Ireland’s investment fund industry has welcomed the introduction of UCITS IV. The continued
expansion and success of the investment fund industry in Ireland following the introduction
of UCITS IV and related developments is fully supported by local industry and government.
The Irish government has already introduced tax amendments to remove barriers to taking
advantage of UCITS IV in the country. As a result, investment funds established in Ireland are
well placed to access benefits made available on introduction of UCITS IV. Further, the general
tax environment makes Ireland an attractive location for investment managers providing
cross-border management services within Europe.
Where the management company retains a foreign branch, the profits of the branch would be taxable in Ireland, with a credit for foreign tax paid in the branch (typically resulting in no additional Irish tax).
Fund level
A non-Irish fund that is managed by a management company in Ireland would typically not be subject to Irish tax. A specific investment manager
exemption confirms that the activities of a regulated management company in Ireland would not create a permanent establishment for an unconnected non-Irish fund. The only exception in this regard is where the fund is a trading fund and the activities of the manager constitute a trade being carried on in Ireland, which is not likely to be applicable to UCITS.
UPDATe: The Finance Act 2010 provides further comfort that no negative Irish tax impact should arise for a non-Irish UCITS with an Irish management company. This comfort was achieved by extending the investment manager exemption (see above) to specifically include situations where a non-Irish UCITS is managed by an Irish management company.
I) Single management company
Management company level
The transfer of all or part of the business of a management company out of Ireland could have tax implications as the transfer could be subject to capital gains tax and/or stamp duty depending on how it is implemented.
Capital gains tax would apply based on the market value of any capital assets transferred (e.g. goodwill). Where the management company retains a branch in Ireland, reorganization relief may apply to avoid any capital gains tax charge. Alternatively, the transfer could be affected through a migration of tax residence, which, in certain circumstances, is not subject to capital gains tax.
From a stamp duty perspective, an exemption for transfers between associated companies may be available.
The transfer of all or part of the activities of a foreign management company into Ireland should not attract any Irish taxation on set-up. The company’s future profits would typically be regarded as trading for Irish tax purposes and would be subject to tax at the rate of 12.5 percent.
Ireland
Seamus Hand
Investor level
The transfer of the management company typically would not have any tax implications for investors unless the transfer resulted in a transfer of residence of an Irish fund outside of Ireland. even in such a situation, no significant Irish tax implications should arise for the investors. Irish investors would remain subject to an exit tax, which would be administered under self-assessment if the fund moved offshore.
II) Cross-border merger
Fund level
There would normally be no Irish tax issues for the fund on a merger. The transfer of assets would be treated as a disposal for tax purposes but would not be subject to Irish tax at the fund level under the gross roll-up rules.
To the extent any Irish equities are in the portfolio, there could be Irish stamp duty implications at a rate of one percent. Certain reliefs may be available depending on the circumstances.
Investor level
The disposal of shares in the fund by an investor as part of a merger (on liquidation) could be subject to tax for Irish investors (non-Irish residents are exempt where declarations of non-Irish tax residence are provided). reorganization relief is not available for a transfer of UCITS out of Ireland.
The transfer of UCITS into Ireland as a part of a merger could have tax implications for the investors. reorganization relief is available to address this issue for a transfer of UCITS into Ireland.
The ongoing tax treatment of investors following a transfer of UCITS into Ireland should not be significant
as non-Irish investors should be entitled to an exemption from exit tax (based on declarations) and Irish investors would continue to be subject to exit tax, albeit based on deduction by the fund as opposed to under self assessment for offshore funds.
III) Master-feeder structure
Fund level
The Irish taxation regime for UCITS funds is determined based on their regulatory status and is not connected to the investment strategy. As a result, the Irish tax treatment for a master fund should be the same as that for a feeder fund where provided for under the UCITS directive. Therefore, under both scenarios, the fund should benefit from exemption under the gross roll-up regime.
A foreign feeder fund should not typically be subject to Irish exit tax in respect of an investment in an Irish master fund (subject to providing a non-resident declaration).
The transfer of assets by an Irish feeder fund to a foreign master should not have any tax implications for an Irish fund as it is exempt from tax.
The acquisition of assets by an Irish master from a foreign feeder should not have any Irish tax implications (unless there are Irish equities).
Investor level
An Irish investor is subject to tax only on an exit event and so it should not be impacted where an Irish fund becomes a feeder as the investors’ position is not affected. The feeder should also not be taxable on distributions from the foreign master as it is essentially tax-exempt.
In the future, if an Italian investment fund will be managed by a foreign management company, the fund should remain subject to the Italian tax rules. on the other hand, a foreign fund managed by an Italian management company should not be subject to the Italian tax rules.
Investor level
As highlighted above, a change in the residence of the management company should not affect the tax treatment of the funds. Subsequently, it should not imply any tax adverse consequence for the investors.
UPDATe: Because the Italian government amended the tax regime for investment funds as of 1 July 2011, note that, in connection with the abolition of the substitutive tax at the investment fund level the taxation has shifted to investors, with a 12.5 percent withholding tax rate on income from capital and a 12.5 percent substitutive tax on capital gains (both the rates have risen to 20 percent as of 1 January 2012). However, the withholding is not levied on income cashed by non-resident investors established in so-called “white-list” states
(i.e. states or territories that have an adequate exchange-of-information system with Italy).
II) Merger
Fund level
Current Italian tax rules do not cover mergers between investment funds (SICAVs and contractual funds). However, according to the tax authorities’ interpretations and guidelines issued by the Italian association of investment management companies, mergers between Italian funds (managed by the same
UCITS IV must be the turning point in
harmonizing the tax treatment of mutual
funds within Europe; otherwise the aim of the
Directive to realize an efficient single market
for funds within EU would be thwarted by
the resulting adverse tax consequences
of the cross-border transactions following
implementation. With this in mind, the Italian
government cannot waste this opportunity to
overhaul the tax treatment of Italian mutual
funds, as announced several times over
the last few years. Reform is also strongly
recommended by asset management
industry players in order to eliminate any
discrepancy in the tax treatment of foreign
and domestic funds that are being penalized
by the application of a 12.5 percent substitute
tax on the accrued year-end result.
I) Single management company
Fund level
There are no specific rules on the tax residency of investment funds in Italian legislation.
The Italian rules governing the tax treatment of Italian collective investment funds apply only to those funds that are ruled by Italian law, irrespective of the place of effective management of the fund.
UPDATe: As of 1 July 2011, investment funds are not considered liable to tax in Italy, since the 12.5 percent substitute tax provided for by the previous tax regime was abolished.
Italy
Sabrina Navarra
KPMG in Italy
management company) are tax-neutral for the fund and the investors if and to the extent that:
• the assets and liabilities of the merged fund are transferred to the merging fund without any
interruption of the management by the fund manager • the merger implies for the investors only an exchange
of units in the merged fund against units in the merging fund.
There are no guidelines regarding cross-border mergers between investment funds.
UPDATe: There is no impact at the fund level as funds are now tax-exempt in Italy.
Investor level
There are no guidelines regarding cross-border mergers between investment funds. At the investor level, there is a potential risk of taxation of unrealized gains.
III) Master-feeder structure
Fund level
The Italian taxation regime for UCITS funds is
determined based on their regulatory status and is not connected to the investment strategy. As a result, the Italian tax treatment for a master fund should be the same as that for a feeder fund.
UPDATe: Under both scenarios, corporate and contractual funds are not considered to be liable to tax in Italy.
no Italian withholding tax should be levied on income derived from an Italian feeder investing in a eU master fund or on payments from Italian master funds to eU feeder funds.
Investor level
no taxation should arise in Italy at the investor level to the extent that the investor will keep units/shares of the same funds.
