Investment Fund Regulatory and Tax developments in selected jurisdictions pptx

1 FUND NEWS January 2013 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 99 – Regulatory and Tax Developments in January 2013 Regulatory News European Union Commission adopts regulatory and implementing technical standards for the Regulation on OTC derivatives, central counterparties and trade repositories On 19 December 2012, the European Commission adopted nine regulatory and implementing technical standards to complement the obligations defined under the Regulation on OTC derivatives, central counterparties (CCPs) and trade repositories. They were developed by the European Supervisory Authorities and have been endorsed by the European Commission without modification. The adoption of these technical standards finalises requirements for the mandatory clearing and reporting of transactions. The full texts of the standards are available via the following web link: x Regulatory Content European Union Regulatory & implementing technical standards for OTC derivatives, CCPs & trade repositories Page 1 ESMA Q&A Short selling and certain aspects of credit default swaps Page 2 Tougher credit rating rules voted by European Parliament Page 2 ESMA approves co-operation agreement with Brazilian regulator Page 2 Luxembourg New status for Advisers of UCIs and SIFs Page 3 Circular 13/557 on EMIR Page 3 CSSF Anti-money laundering Regulation 12-02 Page 4 UK Progress in transposing the AIFMD into UK law Page 5 International IOSCO Suitability rules for distribution of Complex Financial Products Page 6 Tax Content European Union Council agreement on enhanced cooperation for FTT Page 7 Belgium Modification of ‘exit tax’ regime & increase in interest WHT Page 7 Germany Draft Investment Tax Act Page 8 UK HMRC draft guidance on Unauthorised Unit Trusts Page 9 USA FATCA Final Regulations released Page 10 Fund News – January 2013 2 ESMA Q&A on Implementation of the Regulation on short selling and certain aspects of credit default swaps On 30 January 2013 the European Securities and Markets Authority (ESMA) issued a second update of its Questions and Answers paper (Ref: ESMA/2013/159) on the practical implementation of the Regulation on short selling and credit default swaps which is available via the following link: Tougher credit rating rules voted by European Parliament In a Press Release dated 16 January 2013 the European Parliament advised that in the plenary session of the same day, new rules were voted on credit rating agencies. The rules cover the following main areas: 1) Set dates for sovereign debt ratings Unsolicited sovereign ratings could be published at least two but no more than three times a year, on dates published by the rating agency at the end of the previous year. 2) Agencies to be liable for ratings Investors will be able to sue an agency for damages if it breaches the rules set out in the legislation either intentionally or by gross negligence, regardless of whether there is any contractual relationship between the parties. Such breaches would include, for example, issuing a rating compromised by a conflict of interests or outside the published calendar. 3) Reducing over-reliance on ratings To reduce over-reliance on ratings, MEPs urge credit institutions and investment firms to develop their own rating capacities. By 2020 no EU legislation should directly refer to external ratings. 4) Capping shareholdings A credit rating agency will have to refrain from issuing ratings, or disclose that its ratings may be affected, if a shareholder or member holding 10 % of the voting rights in that agency has invested in the rated entity. The new rules will also bar anyone from simultaneously holding stakes of more than 5% in more than one credit rating agency, unless the agencies concerned belong to the same group. ESMA approves co-operations agreements with Brazilian regulator The European Securities and Markets Authority (ESMA) approved the co- operation arrangements between the Brazilian Comissão de Valores Mobiliários (CVM) and the EU securities regulators for the supervision of alternative investment funds (AIFs). The co-operation arrangements include the exchange of information, cross-border on-site visits and mutual assistance in the enforcement of the respective supervisory laws. This co-operation will apply to Brazilian alternative investment fund managers (AIFMs) that manage or market AIFs in the EU and to EU AIFMs that manage or market AIFs in Brazil. Fund News – January 2013 3 Luxembourg New status for Luxembourg investment advisers of undertakings for collective investment (UCI) and specialised investment funds (SIF) On 10 January 2013 the Commission de Surveillance du Secteur Financier (CSSF) published a press release relating to the new status of Luxembourg based investment advisers of UCIs subject to the Law of 17 December 2010, and of SIFs subject to the Law of 13 February 2007. The new status will not impact foreign advisers of Luxembourg UCIs/SIFs. Further to the entry into force of the Law of 21 December 2012 implementing Directive 2010/78/EU amending the powers of the European supervisory authorities, the scope of the Law of 5 April 1993 on the financial sector has been modified. Luxembourg based investment advisers of UCIs or SIFs will now fall in the scope of the Law on the financial sector and they will have to apply for authorisation under Article 24 of that law. The authorisation will be granted by the Minister of Finance. Each Luxembourg based investment adviser of UCIs or SIFs exercising the activity at the time of the entry into force of the Law of 21 December 2012 has until 30 June 2013 at the latest to comply with the requirements of Article 24 of the Law on the financial sector. The entity must contact the CSSF by email (agrements.psf@cssf.lu), before 1 March 2013 in order to ensure that the application can be dealt with within the legal delay. The full text (in French) is available via the following web link: Circular 13/557 on EMIR The CSSF issued Circular 13/557 on 23 January 2013 which provides an overview of the requirements of the European Markets and Infrastructure Regulation (EMIR). The Circular recommends that financial counterparties should assess their EMIR readiness and lists the following questions that should be considered: • Which trade repository can you report to for the types of derivatives you trade? • Will you report directly to the trade repository or delegate reporting to your counterparty or a third party? • Which CCPs accept to clear the types of OTC derivatives you trade? Will you access clearing directly as a ‘clearing member’? If not, you will need to be a client of a clearing member. • Are your existing systems and processes adequate to implement the new operational risk mitigation requirements set out in EMIR? • Do you have collateral agreements in place and sufficient collateral available to collateralise non-cleared OTC derivative trades? The Circular is available on www.cssf.lu Fund News – January 2013 4 CSSF Anti-money laundering Regulation 12-02 The CSSF Regulation 12-02 of 14 December 2012 on the fight against money laundering and terrorist financing has been published on 9 January 2013. Its purpose is first to respond to the FATF criticism set out in the evaluation report of Luxembourg published in 2010, where the legally binding character of the AML/CTF circulars issued by the CSSF and the CAA was challenged. This regulation aims to complete the current AML/CTF legislation in place and to finally transcribe the latest amendments introduced by the Grand- Ducal Regulation of 1 February 2010 and the Law of 27 October 2010. In addition CSSF circulars 08/387 and 10/476 are repealed. What are the main innovations introduced by this Regulation? To follow is a summary of the provisions mentioned in this Regulation that are the most relevant for the investment funds industry. Chapter 2: Scope In cases where investment funds are distributed through intermediaries acting on behalf of underlying investors, i.e. account opened in the name of the intermediaries or in the name of indirect investors, professionals are required upon starting a business relationship to apply enhanced due diligence measures for these intermediaries taking into consideration the same principles applicable to the cross-border correspondent banking relationships or other similar relationships with institutions in Third Countries. As such professionals should gather sufficient information to be in a position to determine the reputation of the intermediary, the quality of supervision, as well as to assess its AML/CTF measures and controls. This information should enable the professionals to assign a level of risk to this intermediary and determine the level of due diligence to apply. Chapter 3: Risk Based Approach According to articles 4 and 5 of the Regulation and as stipulated by article 3(3) of the modified Law of 12 November 2004, ‘professionals are required to perform an analysis of the risks inherent to their business activities’ taking into consideration the risks linked to the nature of their customers, the offered products and provided services. Professionals should set down the outcomes of this analysis in writing and be in a position to communicate this analysis to the CSSF. As such, professionals should assess and categorise their customers according to a certain level of risk. This categorisation needs to be performed prior to client acceptance. It should not be considered as a “one shot exercise” but must be continuously reviewed in order to apply the appropriate due diligence measures to mitigate the identified risks. Article 7 of the Regulation states that in order to apply simplified due diligence measures for direct customers, where the customer is a credit or financial institution of another EU Member State or in a third country as defined by article 3-1 of the modified Law of 12 November 2004 or in order to rely on customer due diligence performed by third parties as defined by article 3-3 of the modified Law of 12 November 2004, professionals should perform a risk assessment of the country where the credit/financial institution or the third party is located. This assessment should enable the professionals to demonstrate that they have sufficiently documented their comfort that the country has equivalent AML/CTF requirements in place to those applied in Luxembourg and that simplified due diligence measures could be applied. The outcomes of such assessment should be reviewed and updated on a regular basis. Chapter 4: Customer due diligence procedures Beneficial owner The obligation to identify the customer and verify its identity includes the identification of the beneficial owner and the fact that professionals should take all reasonable measures and use relevant information or data obtained from a reliable source to verify properly the identity of the beneficial owner. Art 17 of the Regulation indicates that professionals should obtain a written declaration from the customer whether he is acting or not for his own account. The customer will need to agree to inform the professional about any change in the beneficial ownership. There is nevertheless no longer a reference to the former declaration of beneficial owner signed by the beneficial owner itself that was recommended by Fund News – January 2013 5 repealed CSSF circulars 05/211 and 08/387. In addition, there is also a question mark regarding article 23 of this Regulation and the more stringent reinterpretation of the definition of beneficial owner and the 25% ownership threshold defined by article 1(7) of the modified Law of 20 November 2004. Information on the purpose and intended nature of the business relationship While identifying its customers and in order to understand the aim of the business relationship, professionals have the obligation to obtain information as regards the origin of funds of the customers but also as regards the type of transactions foreseen. This information should enable the professionals to conduct an ongoing monitoring of the customers’ business relationship according to article 24 of the Regulation. Although this new Regulation does not reinvent the wheel, we believe that some of its provisions will definitely have an impact on the Investment Funds industry, at the level of the UCI and the Management Company as well as the Registrar, from both a commercial and operational point of view. UK Progress in transposing the AIFMD into UK law On 11 January 2013, HM Treasury (“HMT”) published its first Consultation Paper on the “Transposition of the Alternative Investment Fund Managers Directive” (“AIFMD”). This is the first of two consultations planned by HMT. The second consultation, to be published later in quarter one of 2013, will include guidance on: • scope of application of the Directive, including charity funds; the European Venture Capital Funds (“EuVECA”) and European Social Entrepreneurship Funds (“EuSEF”) Regulations; • marketing of EEA retail funds, third country retail funds, and Financial Services and Markets Act 2000 Section 270 and 272 funds; • application of the approved persons regime to internally managed investment companies; and • application of the Financial Services Compensation Scheme and Financial Ombudsman Service to AIFM. This consultation includes a wider scope for AIFMs than the Directive: • UK managers of authorised funds which are not UCITS authorised funds, so the management of authorised Non-UCITS Retail Schemes (“NURS”) and Qualified Investor Schemes (“QIS”); together with UK managers where the assets under management (“AUM”) are less than €100million will have to comply with the requirements of the AIFMD. • AIFMs of AUM under €100m are, however, to be exempt from three aspects of AIFMD: i) the Delegation Test: that is the requirement for the AIFM to undertake substantially more activities primarily portfolio management or risk management than their delegates and therefore would not be considered a ‘letter-box entity’; ii) certain reporting and transparency requirements such as reporting data to the regulator on leverage; and iii) the remuneration provisions and disclosure requirements of the Directive. However, all other aspects of the Directive are to apply including the regulatory capital and conduct of business rules. Additionally some firms will need to comply with special provisions in regard to the de minimis threshold (€100m), Fund News – January 2013 6 such as: • Private Equity firms, are only in scope of the Directive if they are managing AUM of more than €100m. • Internally-managed funds, such as Investment Trusts, will need to apply for a registration even if the assets are under €100m AUM. The Prospectus and Transparency Directive and update to the FSA Listing Rules will provide sufficient transparency in regard to the activities of these funds. However, the Financial Conduct Authority (“FCA”) will have discretion as to whether they choose to register a fund, if there are concerns around disqualification of directors or criminal activity ; and • Investment Trusts with external managers are required to ensure the external manager is authorised. • For managers of Unregulated Collective Investment Schemes (“UCIS”) under €100m marketing into the UK only on private placement basis there will be no change in regulatory requirements. However, if they manage both authorised funds (NURS and QIS) and UCIS they will have to comply with the requirements for the authorised funds they manage. HM Treasury intends to make no change to the types of investors a NURS or QIS fund can be marketed to. They are also considering changes to the types of FSA permissions that managers can have and which will determine the activities they can undertake. HMT do not intend to make the private placement third country manager requirements greater than the Directive minimum, until the private placement regime is reviewed in 2015. This consultation and the Commission’s Regulations issued in December have triggered an intensive period of implementation activity. Notwithstanding the short period remaining, it is clear that the UK will impose compliance from July 2013 and, for UK AIFMs, will not allow the transition to full compliance to go beyond July 2014. The deadline for responding to this consultation is 27 February 2013. The consultation paper (134 pages) is available via this web link: International IOSCO Publishes Suitability Requirements for Distribution of Complex Financial Products The International Organisation of Securities Commissions (IOSCO) published a final report on ‘Suitability Requirements with respect to the Distribution of Complex Financial Products’, which sets out principles relating to the distribution by intermediaries of complex financial products to retail and non-retail customers. The report introduces nine principles that cover the following areas related to the distribution of complex financial products by intermediaries: • Classification of customers • General duties irrespective of customer classification • Disclosure requirements • Protection of customers for non- advisory services • Suitability protections for advisory services (including portfolio management) • Compliance function and internal suitability policies and procedures • Incentives • Enforcement These principles provide guidance for Members and reflect the current regulatory state of play in the distribution of complex financial instruments by intermediaries among IOSCO’s members. The report is available via the following web link: Fund News – January 2013 7 Tax News European Union Council agreement on enhanced cooperation for Financial Transaction Tax On 22 January 2013 the European Council adopted a decision authorising 11 Member States to proceed with the introduction of a financial transaction tax (FTT) through enhanced cooperation. The proposal on the FTT is expected within the coming weeks. Belgium Modifications of ‘exit tax’ (‘TISbis’) regime and increase of general interest withholding tax rate The law of 13 December 2012 containing various fiscal and financial measures, bringing numerous changes in Belgian tax legislation, was published on 20 December 2012 in the Belgian Gazette. Inter alia, the Belgian ‘exit tax’ regime is affected. The changes aim at aligning the Belgian regime with the EU Savings Directive, broadening the scope of application and reflecting a decision of the Court of the European Union. It shall be recalled that a special tax regime – usually referred to as ‘exit tax’ or also ‘TISbis’ regime – applies for Belgian- resident individuals holding shares or units in certain collective investment institutions. Proceeds derived by the individuals from the redemption of shares or units in, or from the partial or total liquidation of, a qualifying collective investment institution are deemed to be interest income (taxable at a rate of 25%) to the extent that the proceeds relate to investments in debt claims. Bringing down of threshold from 40% to 25% and abolition of grandfathering So far, the exit tax regime came into operation only in respect of collective investment institutions that were invested, directly or indirectly, for more than 40% of their assets in debt claims. This threshold for investment in debt claims has now been brought down from 40% to 25%. This brings the Belgian exit tax regime again in line with the EU Savings Directive, which has provided for the 25% threshold since 1 January 2011. Moreover, the grandfathering clause in Belgian law for debt claims that prior to 1 January 2011 did not fall within the scope of the Savings Directive is now abolished, thereby reflecting the earlier abolition of the grandfathering clause in the EU Savings Directive. Broadening of scope to cover secondary transactions Whilst the exit tax regime was triggered so far only by the redemption of shares or the (partial or total) liquidation, the amended regime applies also on the occurrence of secondary transactions, i.e. the transfer of shares or units. Exclusion of investment entities established in EEA countries and not qualifying for European passport Previously, collective investment institutions without a European passport escaped the application of the exit tax regime provided they were established in a member state of the EU. Following a decision by the Court of Justice of the European Union (10 May 2012; C- 370/11), Belgium has now excluded also those collective investment institutions without a European passport that are established outside the EU but within the European Economic Area. Increase of general interest withholding tax rate to 25% The general interest withholding tax rate has been increased from 21% to 25% for interest paid or attributed as of 1 January 2013. The same tax rate will be applied, as part of the personal income tax assessment, to the (part of) capital gain realised upon redemption, liquidation or sale of shares / units in the aforementioned qualifying collective investment institutions if these are established outside Belgium and no Belgian withholding tax has been applied to the proceeds. Belgian-resident individuals have to report these capital gains in their personal income tax return. Fund News – January 2013 8 Germany Draft Investment Tax Act On 30 January 2013, the German Government circulated a government draft version of the new Investment Tax Act. The proposed changes could in particular affect German investors in foreign hedge funds and private equity funds qualifying as non-UCITS funds, much less investors in UCITS funds. The updated draft contains inter alia a couple of amendments that can be regarded as advantages for those funds. 1. Non-UCITS funds, qualifying as an open-ended alternative investment funds (AIF) − Under the draft a non-UCITS has to fulfill specific requirements in order to qualify as an AIF thus being entitled under a transparent taxation under the Investment Tax Act. Otherwise the general principles of taxation in Germany will apply. These conditions include inter alia: • the existence of an investment supervision and redemption rights (which have to be fulfilled cumulatively, whereby a trading of the fund units at a stock exchange is sufficient to meet the redemption requirement), • the restriction to the investment and administration of assets for the collective account of investors, • no engagement in active entrepreneurial management of the assets and no entrepreneurial influence on the portfolio companies, • principle of risk diversification, • not more than 20% of the fund’s assets may invested in non-listed corporations, • the prohibition of short-term loans exceeding 30% of the fund’s assets, • the restriction to invest in specific eligible assets only (e.g. securities, money market instruments, derivatives, bank loans, precious metals, unsecuritised loan receivables if its market value can be determined), • Up to 10% may be invested in non-eligible assets, • Investment invest in trade fixture and public private partnerships (ÖPP) under certain circumstances. • The restriction, that participations in the same corporation must not exceed 5% of the fund’s assets, has been cancelled. − The grandfathering rule has been taken over from the initial draft. A grandfathering will be granted for the benefit of funds established before 22 July 2013. A grandfathered fund will continue to be treated as investment fund for tax purposes, even if it no longer meets the requirements under the new Investment Tax Act. 2. Foreign investment companies not qualifying as an AIF (foreign investment companies) − One of the main issues of the initial draft was, that investors in foreign investment companies not qualifying as an AIF and organised as a corporation (e.g. a Luxembourg SICAV/ SICAF, Irish PLC or Guernsey Ltd.) would have been taxed on a lump-sum method. This disadvantage is now cancelled. German investors in such investment companies organized as a corporation will now be taxed according to the general income tax rules. Consequently, inter alia the German CFC rules under the Foreign Tax Act will be applicable. In addition, corporate investors can benefit from the 95% participation exemption under § 8b of the German Corporation Tax Act, if the investment company is (i) subject to income tax in its state of residence at a rate of at least 15% or (ii) has its state of residence in European Union or in a treaty state on the European Economic Area and is subject to an income taxation (i.e. not tax exempt). − Please note, that the rules with respect to foreign investment companies comparable with the legal form of a German “Sondervermögen” (e.g. a Luxembourg FCP or a French FCPR) not qualifying as an AIF, have been taken over from the initial draft. This means that these foreign investment companies are deemed to constitute a corporate body within the meaning of § 2 No. 1 of the German Corporation Tax Act and will be therefore subject to limited tax liability with its German source Fund News – January 2013 9 income. Unfortunately no grandfathering will be granted for existing fund structures. For investment structures, however, previously neither taxed according to the Investment Tax Act nor the Foreign Tax Act, thus subject to the partnership rules (Gesonderte und einheitliche Feststellungserklarung), this will bring clarity insofar, as the Foreign Tax Act should in future become applicable. UK HMRC draft guidance on Unauthorised Unit Trusts HM Revenue & Customs (“HMRC”) have now published its draft guidance for Unauthorised Unit Trusts (“UUTs”). This is intended to help taxpayers understand how the new rules will work in practice. While the proposed changes are broadly welcome, two issues that have raised concerns are: 1) the requirement to prepare accounts in accordance with the existing IMA SORP for Authorised Funds (“the AF SORP”); and 2) to have those accounts audited. The AF SORP is designed for the activities, regulation, and operational requirements of funds authorised by the Financial Services Authority (“Authorised Funds”). While the investment and borrowing capabilities of Authorised Funds (UCITS; Non-UCITS Retail Schemes; and Qualified Investor Schemes) have, overall, a substantial capacity for diversity of investments, they are required to deliver features that are not required of UUTs. UUTs may carry out activities; have operational features; and operate with investment assets beyond the scope permitted for Authorised Funds. An example would be property development. Such aspects are not addressed by the AF SORP and preparers of UUT financial statements and the UUT’s auditors may have to interpret the required accounting from the principles in the AF SORP rather than by reference to specific guidance in the AF SORP. The new draft guidance does not offer additional advice for UUTs on this and so it may present additional challenges and result in a wider variation in interpretations when UUTs prepare financial statements. HMRC have requested comments on this draft guidance by 28 February 2013. The legislation will take effect after Finance Bill 2013 receives Royal Assent, with various transitional rules phasing in the changes for existing UUTs. The draft guidance (13 pages) is available via this web link: Fund News – January 2013 10 USA FATCA Final Regulations released On 17 January 2013, the U.S. Department of Treasury (Treasury) and the Internal Revenue Service (IRS) released the final regulations for the Foreign Account Tax Compliance Act (FATCA). Since the enactment of FATCA in March 2010, Treasury and the IRS have issued several rounds of preliminary guidance, including proposed regulations. The recently released final regulations have been much anticipated by taxpayers that expect to be affected by the new FATCA withholding and reporting regime, particularly in light of the looming January 1, 2014, effective date. Several of the key provisions are listed below: • Harmonisation with intergovernmental agreements • Relaxation of certain documentation and due diligence requirements • An expanded scope of “grandfathered obligations” • Liberalisation of requirements for certain retirement funds and savings accounts • Limited FFIs – continued transition rule • Bearer shares • Brokers (delivery vs. payments) • Registration process The KPMG analysis of the FATCA final regulations is available via the following web link: Meet us at: [...]... nathalie.dogniez@kpmg.lu 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 www.kpmg.lu Publications The evolution of an industry – 2012 KPMG/AIMA Global Hedge Fund Survey here: Analysis of UCITS IV tax implications – updated version here: Evolving Investment Management Regulation here: The information contained herein is... 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.. .Fund News – January 2013 We have launched a new channel Fund Views” on our KPMG TV platform In regular videos we outline the latest regulatory developments affecting European Asset Managers Contact us Dee Ruddy Senior Manager T: + 352 22 5151 7369 E: dee.ruddy@kpmg.lu Charles Muller... 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 11 . 1 FUND NEWS January 2013 Investment Fund Regulatory and Tax developments in selected jurisdictions Issue 99 – Regulatory and Tax Developments in January 2013 . ‘exit tax (‘TISbis’) regime and increase of general interest withholding tax rate The law of 13 December 2012 containing various fiscal and financial measures, bringing numerous changes in. to investments in debt claims. Bringing down of threshold from 40% to 25% and abolition of grandfathering So far, the exit tax regime came into operation only in respect of collective investment