Issue 92 – Regulatory and Tax Developments in May 2012

FUND NEWS May 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Regulatory Content Issue 92 – Regulatory and Tax Developments in May 2012 European Union ESMA publishes updated list of measures adopted by competent authorities on short selling Page 1 Luxembourg CSSF publishes Frequently Asked Questions document on the KIID Page 2 CSSF signs new Co-operation Agreements Page 2 Tax Content EU Advocate General’s Opinion that discretionary portfolio management services are not exempt services for VAT Page 2 The Netherlands Tax treaty with Germany Page 3 UK HMRC publish second round consultation document on the future taxation of UUTs Page 4 Luxembourg Luxembourg and Germany sign new tax Regulatory News treaty Page 5 Aberdeen E-alert Page 6 European Union ESMA publishes updated list of measures adopted by competent authorities on short selling On 29 May 2012 the European Securities and Markets Authority (ESMA) published an update regarding the measures taken by EU supervisory authorities regarding short selling. This update includes measures taken by Austria and is available via the following web link: http://www.esma.europa.eu/page/Short-selling Accounting content IFRS for Investment Funds – Issue 4 -Classification of Financial Assets under IFRS 9 Page 6 Othdone through a common Memorandum of Understanding (MoU), which will KPMG European Responsible Investing Fund Survey Page 6 1 Fund News – May 2012 Luxembourg CSSF publishes a Frequently Asked Questions document on the KIID The Commission de Surveillance du Secteur Financier (CSSF) published a Frequently Asked Questions document on the Key Investor Information Document (KIID) for UCITS. The document is available via the following web link: http://www.cssf.lu/fonds-dinvestissement/ CSSF signs new Co-operation Agreements In May 2012 the CSSF signed a co-operation agreement with the China Securities Regulatory Commission (CSRC) on mutual assistance and exchange of information in the areas of securities regulation and securities markets. The CSSF also signed a co-operation agreement with the Egyptian Financial Supervisory Authority on mutual assistance and exchange of information in the areas of regulation, cross-border asset management and financial markets. Tax News European Union Advocate General’s Opinion that discretionary portfolio management services are not exempt services for VAT On 8 May the Advocate General’s (“AG”) Opinion (“the Opinion”) in the Deutsche Bank AG case was issued. It provides a number of interesting points which could impact the provision of wealth management and private banking portfolio management. In the Opinion, the AG concluded that portfolio management services do not fall under a relevant VAT exemption and are, therefore, taxable. The Opinion also states that where advice and execution are provided under a single arrangement, the entire package of services ought to be taxed. The AG also provided some comments on “fiscal neutrality” arguments. The AG suggests that use of this concept is, in this case, limited given the fund management exemption is specifically limited to collective investment schemes. A full European Court of Justice (“ECJ”) judgement is expected to follow within a few months. Background based on 1.8% of the assets under management, comprising 1.2% for advisory services and 0.6% for securities dealing activities. The questions referred to the ECJ were whether: 1) the portfolio management services should be VAT exempt either as a dealing in securities or as a service which fulfils a function similar to fund management services; 2) the package of services constitute a single supply of services for VAT purposes or not; and 3) whether European legislation covering the place of supply of financial services can cover services which fall outside a relevant VAT finance exemption. Opinion The AG decided that it would be artificial to split Deutsche Bank’s services into separately taxed components in that the customer contracted for a single portfolio management service, and the split of fees between advice and execution did not change this. To benefit from exemption both the advisory and execution elements taken together would need to constitute a VAT exempt financial service. Deutsche Bank provided discretionary portfolio management services. The assets were shares and other securities, and, within certain parameters, Deutsche Bank was permitted to buy and sell without requesting approval from the client. It charged a total fee The AG characterised an exempt share dealing service as one principally concerned with the buying and selling of instruments (i.e. the trade itself). In this case the AG decided that the customer’s key aim in engaging Deutsche Bank was to receive its 2 Fund News – May 2012 investment expertise, rather than to execute the underlying trades themselves. Indeed, the Opinion envisaged a situation where no trades were required. On this basis, Deutsche Bank’s services did not have declared VAT to its local tax authority, it should consider whether to do so now. There needs to be a balance between a provider’s need to protect itself from claims from its customers for overcharged amounts and the AG’s view signed. The new tax treaty will most likely apply from 1 January 2014 and will replace the tax treaty of 1959. The maximum rates of withholding tax on dividends are: characteristics of an exempt financial service and were taxable. Deutsche Bank and the European Commission argued that investments in individual portfolios and in special investment funds were sufficiently similar that both should benefit from the same VAT exempt treatment. The AG rejected this on the basis that the fund which strongly suggests any claim would be unsuccessful. The AG’s Opinion is available via this web link: http://curia.europa.eu/juris/document/do cument.jsf?text=&docid=122541&pageI ndex=0&doclang=en&mode=lst&dir=&o cc=first&part=1&cid=565004 • 5% in case of a substantial holding (a holding of at least 10% of the capital); • 10% in case of dividend payments to a Dutch resident pension fund; • 15% in all other cases. management exemption has been drafted such that it only covers collective investment schemes, which would not include individual portfolios. In answering the last question, which is of limited application given the changes to the VAT place of supply rules post 1 January 2010, the AG concluded that whilst the services did not benefit from exemption, they were nevertheless governed by the same VAT place of supply rules. Summary The AG’s Opinion raises issues for investment mandates where a fee is split between taxable advisory services and exempt transaction fees. Taken at its widest reading, it could mean that exempt fees charged under split mandates could, going forward, fall to be taxable (on the basis they constitute payment for a single taxable supply). Where a business which has not yet submitted claims for potentially over- The Netherlands New tax treaty with Germany A new income tax treaty between the Netherlands and Germany has been No withholding tax is levied on interest or royalties. Furthermore, in the Protocol a stipulation with regard to the tax treatment of a Dutch closed FGR (`besloten fonds voor gemene rekening`) is included. A closed FGR is treated as tax transparent for Dutch tax purposes. This implies that all income and gains derived through such FGR are attributed to the investors in proportion to their participations in the FGR. FGRs are frequently used for asset pooling by pension funds and other investors. In the Protocol the German tax authorities confirm that a closed FGR will also be regarded as tax transparent for the application of the income tax treaty concluded between the Netherlands and Germany. This tax transparency also applies to third country investors in the closed FGR. Previously, the Netherlands have concluded similar special agreements 3 Fund News – May 2012 (Competent Authority Agreements) regarding the tax treatment of a closed FGR with Canada, Norway, Denmark and the United Kingdom. It is expected that CAAs with other countries (including the USA and Switzerland) will follow. The new income tax treaty is available via this link (in Dutch) and this link (in greater certainty for investors in exempt UUTs (“EUUTs”). Exempt UUTs are UUTs all of whose investors are themselves exempt from tax on chargeable gains. The proposals also seek to remove certain avoidance opportunities identified by HMRC. The proposals in the consultation are that: EUUT’s status where there are inadvertent non-exempt investors. • Authorised Investment Funds (“AIFs”) will still be able to invest in EUUTs (subject to FSA rules) but this will affect the tax treatment of the AF. The AF will pay corporation tax at the main corporation tax rate rather than 20 percent rate for AFs; German). • EUUTs will remain subject to income tax, but the requirement to withhold basic rate income tax on deemed distributions will be removed. The accounting year will become the basis period and distributions will be deemed to have been made at the end of each and it will not be permitted to make an interest distribution. • Non-exempt UUTs (“NEUUTs”) will be within the charge to corporation tax and any distributions would be treated in the same way as corporate dividends. UK HMRC publish second round consultation document on the future taxation of UUTs accounting period. The EUUT will be liable to income tax to the extent that income is not distributed. Transitional rules will be introduced. • Further simplifications are proposed: it is suggested that EUUTs will not be subject to tax on trading profits if investments are on a “white list” (the paper is silent on whether real estate is to appear on the “white list”). It will be possible to invest in non-reporting offshore funds in a more tax-efficient way provided that sufficient information can be obtained from the underlying funds. Provided that interest is accounted The consultation closes on 20 August with draft legislation to follow in autumn 2012; proposed inclusion in Finance Bill 2013; and for the proposals to take effect from the end of the 2013-2014 tax year. While the framework for EUUTs is similar to before, the proposals are significant and managers of EUUTs and investors in EUUTs (predominantly pension funds and charities) should consider them carefully. In particular those UUTs with a mix of exempt and non-exempt investors should pay close attention as there is a clear steer in the paper that these should restructure. On 24 May 2012 HM Revenue & Customs (“HMRC”) published the second round consultation document relating to proposed changes to the taxation of unauthorised unit trusts (“UUTs”). The proposals aim to: simplify; reduce burdens; and provide for on an accruals basis, the requirement to comply with the accrued income scheme may go. • EUUTs will need to seek approval from HMRC but more proportionate rules will be introduced to address the current “cliff-edge” risk to the • Exempt investors in a NEUUT may begin to experience unacceptable levels of tax leakage; • there will be a clear divide between EUUTs and NEUUTs; and 4 Fund News – May 2012 • the UUT will become less attractive as a vehicle for non-exempt Some important highlights are summarized below: companies are generally not taxable (unless the alienator had a investors; however there may still be a place for such an open-ended unauthorised vehicle. The second consultation document (32 pages) is available via this web link: http://customs.hmrc.gov.uk/channelsPor talWebApp/channelsPortalWebApp.porta l?_nfpb=true&_pageLabel=pageLibrary_ ConsultationDocuments&propertyType= document&columns=1&id=HMCE_PRO D1_032081 Luxembourg Luxembourg and Germany sign new tax treaty On 23 April 2012 Luxembourg and Germany signed a new income and capital tax treaty. ... - --nqh--