Cross-Border Distribution of UCITS

A CACEIS PRODUCT DEVELOPMENT PUBLICATION - 2011

CHALLENGES & OPPORTUNITIES

Taxation issues

3.2

Luxembourg and Irish tax regimes are viewed more favourably than many other jurisdictions across most fund types. However, taxation remains a major issue for cross-border fund distri- bution due to the existence of multiple taxation regimes for investment funds and investors. As the European Commission stated in its Green Paper published in July 2005 on ”the enhance- ment of the EU framework for investment funds”, “tax constraints often generate additional ad- ministrative requirements and are powerful financial disincentives”. In Asia as well, each juris- diction has developed its own tax requirements. Taxation of foreign funds, taxation of residents investing in funds domiciled abroad and various fiscal requirements depending on jurisdictions are significant factors asset managers must consider before marketing a fund cross-border, via public distribution or private placement. The main taxation issues are described hereafter. Depending on the country of domiciliation, funds can be subject to taxation of income/capital gains, withholding taxes on income received and/or other taxation (e.g. composition duty in Luxembourg). With regard to unit-holders/investors, they may be subject to taxation on income/ capital gains realised. Within a country, several tax regimes can apply depending on the status of the unit-holder/investor (resident or non-resident) and depending on the domiciliation of the fund (domestic or foreign fund) in which investments are made. While in Europe major tax discrimination measures against foreign funds and residents invest- ing in non-resident funds have progressively been abolished under pressure from the European Commission and the European Court of Justice (as an example, since January 2005 the PEA regime in France allows investors to hold foreign funds), outside Europe many countries still have tax regimes in place which favour domestic funds, such as in South Korea where a tax barrier penalises foreign funds against local products. Within the European Union, even though there is still a way to go before the net revenue of the various investments made by UCITS is equal everywhere, taxation of UCITS is today basically identical whether UCITS are marketed domestically or on a cross-border basis. However, you should not ignore that a number of EU Member States have legislated for foreign UCITS to provide tax reporting in order to benefit from the same taxation as domestic UCITS. Thus, in countries such as Germany and Austria, foreign funds will have to obtain a specific tax status to be attractive to local investors (“fully transparent” status in Germany, “white” or “extra-white” status in Austria). Hence the ability of the fund to calculate the relevant figures, such as the publication at each NAV date of the “Aktiengewinn” (equity gain), “Zwischengewinn” (interim profit) and “Immobiliengewinn” (real estate profit) in Germany for fully transparent funds, and deliver the relevant tax information to investors via financial data providers and financial news- papers is crucial to avoid huge taxation of investors. To get the preferential tax treatment, the tax information deliveredmay be certified to ensure that the determination of the published data is compliant with the local tax requirements. Again, the need to comply with these local rules imposes an additional cost and administrative burden on funds distributed in these countries. In terms of taxation, another constraint lies in the EU Savings Directive application, implement- ed in July 2005. Indeed, UCITS (and a lot of other savings products) are covered by this Direc- tive, which requires paying agents making cross-border interest payments to EU individuals to obtain and verify certain information about those individuals and either to report information about the interest payments to their domestic tax authorities (among jurisdictions committed to the exchange of information are Denmark, France, Germany, Italy, the Netherlands, Spain Taxation of funds and investors

3.2.1

Tax constraints often generate additional

administrative requirements and are powerful financial disincentives.

3.2

Notice

Through its post-registration services, CACEIS can ensure you that all tax obligations are satisfied when distributing internationally.

Cross-border distribution of UCITS | page 47