1 FUND NEWS May 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 92 – Regulatory and Tax Developments in May 2012 Regulatory News 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 done through a common Memorandum of Understanding (MoU), which will Regulatory Content 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 treaty Page 5 Aberdeen E-alert Page 6 Accounting content IFRS for Investment Funds – Issue 4 - Classification of Financial Assets under IFRS 9 Page 6 Other news KPMG European Responsible Investing Fund Survey Page 6 Fund News – May 2012 2 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 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 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. 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 Fund News – May 2012 3 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 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 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- 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 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 The Netherlands New tax treaty with Germany A new income tax treaty between the Netherlands and Germany has been 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: • 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. 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 Fund News – May 2012 4 (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 German). UK HMRC publish second round consultation document on the future taxation of UUTs 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 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: • 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 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 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 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; 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. 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. • 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 Fund News – May 2012 5 • the UUT will become less attractive as a vehicle for non-exempt 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. The new treaty generally follows the OECD Model Convention and will, once ratified by both countries, replace the existing 1958 tax treaty. Some important highlights are summarized below: • The withholding tax (WHT) rate on dividends is reduced to 5% (from 10% before) where the beneficial owner is a company of the other Contracting State holding at least 10% of the capital of the paying company (before a stake of 25% of the voting shares was required). • The new tax treaty provides (as the previous tax treaty) a zero WHT rate for interest and a 5% WHT rate for royalty payments. • Income paid on convertible and profit participating bonds should under the new tax treaty fall within the interest provision (in the previous tax treaty, this income has been explicitly covered by the dividend article). Accordingly, there should generally be no WHT on such payments (unless the instrument is classified as equity in the State in which the issuing company is resident). • According to the new tax treaty, capital gains realized upon disposal of shares in a company deriving more than 50% of their value (directly or indirectly) from immovable property situated in a the other Contracting State may under the new tax treaty be taxed in the state of the immovable property. While under current Luxembourg tax law, capital gains realized by non-resident taxpayers upon disposal of shares in resident companies are generally not taxable (unless the alienator had a participation of more than 10% and realized capital gains of speculative nature), German tax law provides under certain conditions for the taxation of capital gains realized by non-residents upon disposal of participations in German companies. • The new tax treaty limits the scope of permanent establishments when stating that building sites, construction and installation projects constitute a permanent establishment provided that they last more than 12 months (before this period was set at 6 months). • The new tax treaty provides for a detailed article that allocates taxing rights over different kind of pension payments (for example, pensions paid by a social security of a Contracting State), thereby increasing legal certainty in this respect. • While Luxembourg generally applies the exemption method (with a reserve for progression) and the credit method in regard to income that is subject to a limited WHT in Germany (i.e. dividends, interest and royalties), Germany adopted the exemption method only where certain conditions are met. For example, business profits deriving from a Luxembourg permanent establishment or dividends paid by a Luxembourg company are only tax exempt if the income is derived from active business as defined Fund News – May 2012 6 under German tax law (i.e. so-called active business test). Nevertheless, the German participation exemption regime should continue to apply in these cases. If an exemption is not granted, the income will be taxed in Germany and the so-called tax credit method be applied. • According to the protocol of the new tax treaty, SICARs, SICAVs and SICAFs may benefit from the reduced/zero withholding tax rates provided in regard to dividends and interest payments. If certain conditions are met, these withholding tax rates may also benefit to Luxembourg FCPs. Further details of the treaty will be reported subsequently. Aberdeen E-alert The latest Aberdeen E-Alert (tax newsletter focusing on withholding tax reclaims based on the Aberdeen case law) discusses the conclusions of the European Court of Justice (ECJ) in relation to the French withholding tax on outbound dividends to foreign UCITS. The full text of the e-alert is available via the following web link. Accounting News IFRS for Investment Funds – Issue 4 - Classification of Financial Assets under IFRS 9 This publication will guide you through the practical application issues that investment funds may encounter when applying the classification requirements of IFRS 9 Financial Instruments that is to supersede IAS 39 Financial instruments: Recognition and Measurement. It discusses the key requirements and includes interpretative guidance and illustrative examples. http://www.kpmg.com/Global/en/Issues AndInsights/ArticlesPublications/ILine-of- Business-publications/Pages/IFRS- investment-funds-isse-4.aspx KPMG European Responsible Investing Fund Survey How is Responsible Investing defined? What is the size of the Responsible Investing “RI” Fund Market in Europe? What are the favoured domiciles of such funds? The “European Responsible Investing Fund Survey” carried out by KPMG Luxembourg and commissioned by the Luxembourg Fund Association (ALFI) intends to answer these questions by giving a snap shot of the European Responsible Investing Fund universe. Whilst this study confirms that Responsible Investment funds remained a niche product in 2010, with EUR 129.49 billion, across a total of 1,236 investment fund vehicles, the survey indicates that the sector, driven by customers demand and policy initiatives will encounter significant evolution in the future. For instance, this study confirms that social entrepreneurship funds were marginal in 2010 but with the EU initiative on Social Entrepreneurship funds, this picture could radically change in the upcoming years. Impact investment should also be accelerated by the creation of new investment vehicle options such as the “société d’impact” currently discussed within the Luxembourg framework. There is no doubt that Responsible Investing will evolve in the future and this study is critical in order to be able to track the progress of this growing sector in the coming years. To read the full report please click here and for a podcast on the findings please click here:. Fund News – May 2012 7 Contact us Dee Ruddy Senior Manager T: + 352 22 5151 7369 E: dee.ruddy@kpmg.lu Audit Nathalie Dogniez Partner T: + 352 22 5151 6253 E: nathalie.dogniez@kpmg.lu www.kpmg.lu Publications Tax Georges Bock Partner T: + 352 22 5151 5522 E: georges.bock@kpmg.lu Advisory Vincent Heymans Partner T: +352 22 5151 7917 E: vincent.heymans@kpmg.lu The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. © 2012 KPMG Luxembourg S.à r.l., a Luxembourg private limited company, is a subsidiary of KPMG Europe LLP and a member of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International. A Disputed Proposal: An Overview of the Financial Industry's Response to the Volcker Rule here: The evolution of an industry – 2012 KPMG/AIMA Global Hedge Fund Survey here: Charles Muller Partner T: +352 22 5151 7950 E: charles.muller@kpmg.lu Dodd-Frank for Foreign Financial Institutions - Geared up for change? here: . FUND NEWS May 2012 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 92 – Regulatory and Tax Developments in May 2012 . exempt financial service and were taxable. Deutsche Bank and the European Commission argued that investments in individual portfolios and in special investment