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.
Top Related