BostonNew York

San FranciscoWashington, DC

OECD Committee on Fiscal Affairs Roundtable on Collective Investment Vehicles February 1-2, 2006 -- Paris, France

Selected Treaty Issues Affecting Collective Investment Vehicles Investing in Securities

Stephen E. Shay, Ropes & Gray LLP

2

Cross-Border Portfolio Investment Through CIVs

• At June, 2005, mutual fund assets worldwide (in 41 countries) were $16.41 trillion.* – $8.2 trillion were held in the United States – $5.6 trillion were held in Europe

* Investment Company Institute, Worldwide Mutual Fund Assets and Flows, Second Quarter 2005, Supplementary Tables, Table S1, “Total Net Assets in U.S. Dollars,” found at http://www.ici.org/stats/mf/ww_06_05.html#TopOfPage.

3

Cross-Border Portfolio Investment Through CIVs

• Benefits of CIVs to investors.– Investors achieve economies of scale and

reduced transactions costs.

– Investors receive benefits of professional investment management.

– Investors achieve diversification of investments.

– CIVs are important source of investment capital for source countries.

4

Cross-Border Portfolio Investment Through CIVs

• CIV structural imperatives.– CIVs must realize income and gains on a

tax neutral basis compared with direct ownership of securities.

– Unrelieved tax costs discourage co-mingling in a CIV with international investments diminishing cross border portfolio investment.

5

Legal and Tax Attributes of CIVs

• CIV investors include:– Institutional investors, many of whom at

tax-exempt.

– Individual investors.

• Funds may be marketed publicly or privately.

6

Legal and Tax Attributes of CIVs

• CIVs legal form may be– Recognized as a separate taxable legal

entity, or

– Transparent for tax purposes.

7

Legal and Tax Attributes of CIVs

• CIV tax characteristics.– Irrespective of the legal form of the CIV,

there is little or no effective taxation of the CIV.

– Low or no taxation of CIVs is accomplished in myriad ways. CIV may be

• “Not a person” or transparent, • Exempt from tax, • Subject to tax at low or zero tax rates,• Subject to tax with the integration at the

investor level.

8

Legal and Tax Attributes of CIVs

• Home country or third country CIV.– United States, the United Kingdom,

France, Germany and other countries have substantial national mutual fund or investment fund industries serve principally resident investors.

– Other fund locations, including Luxembourg and Ireland, service investors primarily from third countries.

9

CIV Difficulties in Obtaining Source Country Treaty Relief

• CIV-level treaty issues.– Whether the CIV is a person and a

“resident” of the treaty country.

– The CIV is the “beneficial owner” of income whether CIV satisfies any limitation on benefits provisions.

10

CIV Difficulties in Obtaining Source Country Treaty Relief

• Practical tax reclaim issues.– Not practical for investors in a publicly

offered or widely-owned CIV to claim treaty relief.

– In summary, CIVs face lack of direct access to treaty benefits and an inability to implement refund claims for investors.

11

CIV Difficulties in Obtaining Source Country Treaty Relief

• CIV treaty relief – dividends.– Resident CIV must be “liable to tax.”

– CIV must be beneficial owner of dividends.

– US-style limitation on benefits:• Exemption for publicly-traded companies

does not apply to “open-end” funds.• Ownership test difficult to administer.

12

CIV Difficulties in Obtaining Source Country Treaty Relief

• Pension plans and other tax-exempt investors– Some treaties allow pension plans, tax-

exempt organizations exemption from source country taxation.

– CIVs sometimes organize to pool these investors’ funds.

– CIVs should be allowed to accommodate these funds.

13

Principles for Obtaining Source Country Treaty Relief

• Principles for addressing CIV/Investor treaty issues.– Avoid double taxation, do not foster double non-

taxation.

– Treat economically similar investors similarly.

– Preserve benefits of residence country tax-exemption.

– Implementation of treaty relief at CIV level.

• Do not expect a “one size fits all” solution.

14

Addressing CIV Treaty Issues

• Consider modifying treaty rules for CIVs.– Residence issues.

• Clear definitions for classification of CIV forms as transparent and non-transparent.

• Clear rules for whether CIV is eligible to claim treaty relief directly.

• If CIV subject to tax, it should be allowed to claim treaty relief.

15

• Consider modifying treaty rules for CIVs (cont’d)– Transparent CIV entities.

• To the extent possible, consistent with treaty purposes, identify transparent CIV entity may claim treaty relief on behalf of its investors.

• For example, treaty relief allowed at the level of the CIV if investors are from qualifying countries that treat the CIV as transparent.

Addressing CIV Treaty Issues

16

• Consider modifying treaty rules for CIVs (cont’d)– Beneficial owner and limitation on benefit

issues. • If income taxed to the investor through

withholding or directly, treaty eligibility should be allowed at entity level.

• Tax-exempt entities.

• Consider special CIV treaty rules

Addressing CIV Treaty Issues

17

Improve Treaty Reclaim Process

• Relief at source should be the objective.• Streamline procedures for standardize

documentation requirements.– Permit use of omnibus accounts (pooling of

assets).

– Documentation by intermediary with a “know-your customer” relationship with investor.

– Documentation should be “verifiable” by the source country.

• See G30 Proposal

18

Next Steps

• Consider convening advisory group including representatives from industry to further examine issues and alternative solutions.