| Tax Monitor |  |
Enhancement of investment funds tax regime |
| Seamus Hand |
| There are a number of significant current market developments that will influence the shape and domicile of the global investment funds sector. The tax regime for investment funds means that Ireland is well placed to benefit from these developments although we need to maintain focus on addressing key industry issues, writes Seamus Hand |
| The Ireland Funds Report in the July edition of this magazine highlighted the success of the Irish funds’ sector in developing Ireland as a domicile of choice for internationally distributed investment funds and ancillary support services over the last 20 years. Ireland’s favourable tax regime has been instrumental in this success story. Luxembourg remains the biggest competitor location in Europe although other EU States are targeting the sector for significant growth particularly in the context of market developments such as UCITS IV, AIFMD and the convergence of accounting rules. Ireland needs to keep a constant focus on enhancing its tax regime for investment funds to retain its status as one of the key onshore fund domiciles. Recent improvements are discussed further below. They are very welcome but competition between existing and emerging domiciles has increased. The gross roll up tax regime that gave us a competitive advantage in the past is now becoming more widely available. Ireland’s favourable investment funds tax regime The regime essentially provides for no Irish taxation for non Irish tax resident investors in Irish regulated funds. This means there is no tax at fund level, no withholding taxes on payments from the fund and no taxation of income and gains derived by the investors. There are certain administrative requirements which can apply to require the investors to provide declarations to the fund although in a welcome recent development, Finance Act 2010 has relaxed these requirements for funds which are not marketed to Irish investors. The move onshore: Europe is the place to be There are a number of recent factors leading investment fund managers, in particular hedge fund managers, to look at onshore EU locations as a domicile of choice over offshore locations. • AIFMD The forthcoming Alternative Investment Fund Managers Directive (“AIFMD”) is expected to apply to all non- UCITS hedge funds that are marketed within Europe, even if domiciled outside the EU. Its aim is to create a harmonised regulatory framework across the EU for managers of alternative investment funds. However, it is likely to impose a regulatory and compliance burden which previously didn’t apply to “offshore” vehicles being marketed in Europe. As currently drafted, AIFMD will allow EU-domiciled hedge fund managers to obtain an EU passport that would permit them to market EU and non-EU funds across Member States, a significant advantage over non EU managers. Naturally, these developments are causing investments managers to look at possible relocation of operations into Europe and an increased use of onshore investment fund vehicles. • FIN 48 For accounting periods commencing since 15 December 2008, certain investment funds have had to consider recognising uncertain foreign tax liabilities, which were previously unrecognised, in their accounts, under FIN 48. Funds that have access to double tax treaties are likely to have a more certain tax position which adds to the attractiveness of onshore locations. • UCITS IV UCITS funds are not restricted to EU investors as they are also recognised by many non-EU regulators for distribution in their countries. The enhancements to the UCITS regulations introduced in the UCITS IV Directive should provide further encouragement to investment managers to domicile funds onshore in Europe to benefit from the European passport and globally recognised regulated brand. UCITS IV facilitates the centralisation of fund structures and the related fund management services in a single EU Member State. This provides the opportunity for real benefits in terms of cost efficiency for fund platforms and is likely to increase the level of competition among fund domiciles. A number of the possible developments under UCITS IV (e.g. the management company passport, master feeder structures and cross border mergers) may result in significant tax considerations for many Member States*. • US FATCA The US Foreign Account Tax Compliance Act (“FATCA”) was passed in 2009. When it fully comes into effect (in 2013) it will require that foreign financial institutions (including hedge funds) report US investors’ identities to the IRS. In the event of non compliance, 30% US withholding tax will apply to “any withholdable payment” the institution receives on US source investments. The rules will apply regardless of the location of the fund although it is likely that onshore jurisdictions will provide more scope for limiting the exposures, particularly where tax treaty access is available. The above market developments, some of which are still at an early stage, are causing investment funds (particularly hedge funds) to restructure into fully regulated status in the form of an onshore UCITS. These developments are further driven by recession-burnt investors favouring regulated vehicles with risk limitations and enhanced investor protection. Positive developments in Ireland Ireland needs to remain at the top of the EU league table for investment fund domiciles in terms of competitiveness, efficiency etc. Countries with established investment management industries such as the UK, in particular, are making significant reforms to remove tax barriers that had curtailed them from competing against traditional fund vehicle domiciles. To date, the Department of Finance has responded swiftly to representations from industry on how to protect and develop the industry. This has facilitated the introduction of new legislation in relation to re-domiciliation, UCITS IV and easing the administrative burden on funds. This combines with an established regulatory offering for non-UCITS funds, including Qualified Investor Funds (“QIFs”) and Professional Investor Funds (“PIFs”), to provide a high quality offering for investment managers. • Re-domiciliation Legislation to provide a quick and streamlined process to allow non-Irish corporate funds re-domicile in Ireland was passed late last year. This process is simple and straightforward and applies to UCITS and non-UCITS. This legal ability to re-domicile (rather than reorganising into a new Irish fund) should help achieve tax neutrality as the change of domicile would not be classified as a taxable event for investors. In addition, for non-corporate funds that generally need to migrate onshore under a reorganisation, legislation has been introduced to facilitate some of the administrative requirements for investors. • UCITS IV The industry in Ireland has moved quickly to identify the Irish tax implications of UCITS IV enhancements and amendments have been introduced to facilitate investment managers looking to take advantage of UCITS IV. EU Passport UCITS IV introduces a full EU passport for UCITS management companies and raises questions as to whether the location chosen for the management company may affect the tax residence of the fund. Finance Act 2010 provides that the existence of an Irish management company will not cause a non-Irish UCITS to become Irish tax resident nor will it cause it to be treated as an Irish fund in the hands of Irish investors. Even if a non Irish fund were considered to be carrying on a trade in Ireland through the appointment of an Irish management company, it is specifically provided that such a trade will not be taxable in Ireland. Cross-border mergers Finance Act 2010 provides for an exemption from stamp duty where a non Irish investment fund merges with an Irish fund (whether UCITS or non-UCITS). This exemption will assist in clarifying the tax treatment of cross border mergers between UCITS funds that will be facilitated under the Directive. Master-feeder structures Master-feeder structures for UCITS are facilitated under UCITS IV although the use of a non-transparent entity as the master can have an unintended impact on the withholding tax position of the feeder funds. Ireland has a tried and tested tax transparent vehicle in the form of the CCF giving it a head-start over some other jurisdictions in taking advantage of the flexibility offered by the new framework. Under the CCF tax regime, income and gains are treated as if they directly accrue to the investors and so no Irish tax applies unless the investor is within the scope of Irish tax and no withholding tax arises on CCF payments. More to do The investment fund industry in Ireland has been very adept at addressing particular issues thrown up by some of the aforementioned developments. However, one area where more support is needed is in relation to the expatriate tax regime and in particular how it applies to the investment management sector. The tax regime in Ireland for expatriates was significantly amended in 2006. Despite recent improvements, it remains uncompetitive in attracting key decision makers to locate here. Our ability as an industry to move up the value chain is largely dependent on our ability to attractive senior industry personnel to relocate here. Individual investment managers place significant weight on the personal tax regime they will face when deciding where to locate. Given the spinoffs to the broader economy, policy makers need to look at reinstating a more meaningful and less cumbersome expatriate regime. Another fundamental point is the need to continue and indeed increase efforts to develop our double tax treaty network. As countries such as the UK increase the attractiveness of their regimes, the significance of their far more extensive treaty network could become crucial as a means of reducing overseas withholding tax. Finance Act 2010 demonstrated continued recognition from the Department of Finance that the investment funds sector is a significant success story. To keep it that way we need to keep abreast of regulatory developments and resulting trends and to remain at least one step ahead of our competition in identifying and meeting the challenges these developments may create. *For a recent KPMG publication on the tax issues associated with UCITS IV - “UCITS IV Fill the Glass to the Brim”, email taxmonitor@kpmg.ie. |
Seamus Hand is a Tax Partner and Head of Investment Management Tax Practice in KPMG Ireland. |